Project Report On

Investment Banking & IPOs

SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT
OF POST GRADUATE DIPLOMA IN BUSINESS MANAGEMENT (PGDBM)
APPROVED BY AICTE

SUBMITTED BY:

HARDIK MEHTA

PGDBM - FINANCE

BATCH: 2010 - 12

SUBMITTED TO:

DR. GULAB MOHITE

N. L. DALMIA INSTITUTE OF MANAGEMENT STUDIES &

RESEARCH
SHRISHTI, SECTOR 1, MIRA ROAD (E), MUMBAI 401104
 Certificate

This is to certify that Mr. Hardik Mehta, student of N.L. Dalmia Institute of
Management Studies and Research, has successfully carried out the project titled
Investment Banking & IPOs under my supervision and guidance as partial
fulfillment of the requirements of PGDBM course, Mumbai University Batch 2010-
12.

Prof. P.L. Arya Dr. Gulab Mohite

Director Project Guide

N. L. Dalmia Institute of Management Studies & Research

Date:

Place: MUMBAI

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 Declaration

I, Hardik Mehta, student of PGDBM (Finance) 2010-12, hereby declare that I

have completed the project on Investment Banking & IPOs.

The information submitted is true and original to the best of my knowledge.

Signature of Student
Hardik Mehta

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 Acknowledgement

I take this opportunity to express my deep and sincere gratitude to Dr. Gulab
Mohite for her valuable guidance and encouragement in implementing the project.
It is because of his efforts that I was able to cover the manifold features of the
project.

I am also thankful to the Director of my Institute, Prof. P. L. Arya and all the other
faculty and non-faculty members of the Institute for their support and
encouragement.

Finally I am thankful to my Family and all the Friends who have given their full
support in collecting the required information and continuous help during the
preparation of the project.

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 Table of Contents

SR NO CONTENTS PG NO.
1 EXECUTIVE SUMMARY 5
2 INVESTMENT BANKING: INTRODUCTION 6-7
3 COMMERCIAL BANKING V/S. IVESTMENT BANKING 8-9
4 FUNCTIONS OF AN INVESTMENT BANK 10-12
ROLE OF INVESTMENT BANKING IN M&A, PVT
5 13-19
PLACEMENTS, FINANCIAL RESTRUCTURING
6 IPO: INTRODUCTION 22-24
7 IPO DEFINED, ADVANTAGES & DISADVANTAGES 25-27
8 PRICING OF AN IPO 28-29
9 BOOK BUILDING: LATEST AVAATAR OF PRICE DISCOVERY 30-31
10 MARKETING OF IPO 32-33
11 A BRIEF NOTE ON INTERMEDIARIES 34-37
12 SEBI NORMS & GUIDELINES 38-45
13 FUTURE OF INVESTMENT BANKING 46-47
14 CONCLUSION 48
15 BIBLIOGRAPHY 49

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 Executive Summary
Introduction:
Unless you work in finance, you may not have come across the term investment bank before the
global meltdown began. To put it simply, an investment bank is nothing like the corner institution
you're used to dealing with to get a business loan or deposit your paycheck. Instead, an
investment bank is a special type of financial institution that works primarily in higher finance by
helping company access the capital markets (stock market and bond market, for instance) to raise
money for expansion or other needs.

Problem Statement:
o To study the various functions of an Investment Bank which includes Corporate Finance,
trading, sales and research and syndicate functions.
o Simultaneously also to study the role of Investment Banks in Initial Public Offer (IPOs)

Aim:
To understand critically the working of Investment Banks and also the role of Investment Banks in
the entire IPO Process. We also look at how an IPO is priced and how the book building
procedure as a mechanism of price discovery is more advantageous.

Scope & Analysis of the Study:

Investment banking is not one specific function or service but rather an umbrella term for a range
of activities. The scope of study is extensively towards the role played by I-Banks in various
market related activities. We also look at the procedure of marketing an IPO followed by the SEBI
norms and guidelines with respect to an IPO.

Conclusion:
To conclude, Investment banking is a field of banking that aids companies in acquiring funds. In
addition to the acquisition of new funds, investment banking also offers advice for a wide range of
transactions a company might engage in. Thus towards the end, we study the future of
Investment Banking.

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INTRODUCTION

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WHAT IS INVESTMENT BANKING?

Commercial banks and investment banks perform primarily different functions. When Mr. XYZ needed
money to buy a car, he visited a commercial bank. When Nokia needed to raise cash to fund an
acquisition or to build more factories, it made a phone call to its investment bank.

Investment banking is not one specific function or service but rather an umbrella term for a range of
activities. Investment banks, or I-banks, issue securities (underwriting), manage portfolios of financial
assets, trade securities (stocks and bonds), help investors purchase securities and provide financial
advice and support services.

I-banks offer these services to governments, companies, non-profit institutions and individuals. They
also engage in numerous proprietary activities in the financial markets - activities where they are their
own clients.

So then, What is investment banking? Is it investing? Is it banking? Really, it is neither. Investment

banking, in broader terms is the term used to describe the business of raising capital for companies.

Capital essentially means money. Companies need cash in order to grow and expand their
businesses; investment banks sell securities to public investors in order to raise this cash.

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COMMERCIAL BANKING V/S
INVESTMENT BANKING

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COMMERCIAL BANKING V/S INVESTMENT BANKING

Before describing how an investment bank operates, let's back up and start by describing traditional
commercial banking. Commercial and investment banking share many aspects, but also have many
fundamental differences.

While regulation has changed the businesses in which commercial and investment banks may now
participate, the core aspects of these different businesses remain intact. In other words, the difference
between how a typical investment bank and a typical commercial operate bank is simple: A
commercial bank takes deposits for checking and savings accounts from consumers while an
investment bank does not. We'll begin examining what this means by taking a look at what
commercial banks do.

Commercial banks

A commercial bank may legally take deposits for checking and savings accounts from consumers.
The typical commercial banking process is fairly straightforward. You deposit money into your bank,
and the bank loans that money to consumers and companies in need of capital (cash). You borrow to
buy a house, finance a car, or finance an addition to your home. Companies borrow to finance the
growth of their company or meet immediate cash needs. Companies that borrow from commercial
banks can range in size from the dry cleaner on the corner to a multinational conglomerate.

Investment banks

An investment bank operates differently. An investment bank does not have an inventory of cash
deposits to lend as a commercial bank does. In essence, an investment bank acts as an intermediary,
and matches sellers of stocks and bonds with buyers of stocks and bonds.

Note, however, that companies use investment banks toward the same end as they use commercial
banks. If a company needs capital, it may get a loan from a bank, or it may ask an investment bank to
sell equity or debt (stocks or bonds). Because commercial banks already have funds available from
their depositors and an investment bank does not, an I-bank must spend considerable time finding
investors in order to obtain capital for its client.

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 FUNCTIONS

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GENERALLY, THE BREAKDOWN OF AN INVESTMENT BANK INCLUDES THE
FOLLOWING AREAS:

Corporate Finance
The bread and butter of a traditional investment
bank, corporate finance generally performs two
different functions:

1) Mergers and acquisitions advisory and

2) Underwriting.
On the mergers and acquisitions (M&A) advising side
of corporate finance, bankers assist in negotiating
and structuring a merger between two companies. If,
for example, a company wants to buy another firm,
then an investment bank will help finalize the
purchase price, structure the deal, and generally
ensure a smooth transaction.

The underwriting function within corporate finance

involves shepherding the process of raising capital
for a company. In the investment banking world,
capital can be raised by selling either stocks or bonds
to investors.

Sales
Sales is another core component of any investment
bank. Salespeople take the form of:
1) the classic retail broker
2) the institutional salesperson
3) the private client service representative

Brokers develop relationships with individual

investors and sell stocks and stock advice to the
average XYZ..

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Institutional salespeople develop business relationships with large institutional investors. Institutional
investors are those who manage large groups of assets, for example pension funds or mutual funds.

Private Client Service (PCS) representatives lie somewhere between retail brokers and institutional
salespeople, providing brokerage and money management services for extremely wealthy individuals.
Salespeople make money through commissions on trades made through their firms.

Trading
Traders also provide a vital role for the investment bank. Traders facilitate the buying and selling of
stock, bonds, or other securities such as currencies, either by carrying an inventory of securities for
sale or by executing a given trade for a client. Traders deal with transactions large and small and
provide liquidity (the ability to buy and sell securities) for the market. (This is often called making a
market.) Traders make money by purchasing securities and selling them at a slightly higher price.
This price differential is called the "bid- ask spread."

Research
Research analysts follow stocks and bonds and make recommendations on whether to buy, sell, or
hold those securities. Stock analysts (known as equity analysts) typically focus on one industry and
will cover up to 20 companies' stocks at any given time. Some research analysts work on the fixed
income side and will cover a particular segment, such as high yield bonds or U.S. Treasury bonds.
Salespeople within the I-bank utilize research published by analysts to convince their clients to buy or
sell securities through their firm. Corporate finance bankers rely on research analysts to be experts in
the industry in which they are working. Reputable research analysts can generate substantial
corporate finance business as well as substantial trading activity, and thus are an integral part of any
investment bank.

Syndicate
The hub of the investment banking wheel, syndicate provides a vital link between salespeople and
corporate finance. Syndicate exists to facilitate the placing of securities in a public offering, a knock-
down drag-out affair between and among buyers of offerings and the investment banks managing the
process. In a corporate or municipal debt deal, syndicate also determines the allocation of bonds.

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 M & A, PRIVATE PLACEMENTS
AND FINANCIAL
RESTRUCTURING

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ROLE OF INVESTMENT BANK IN MERGERS & ACQUISITIONS

In the 1980s, hostile takeovers and LBO acquisitions were all the rage. Companies sought to
acquire others through aggressive stock purchases and cared little about the target company's
concerns. The 1990s were the decade of friendly mergers, dominated by a few sectors in the
economy. Mergers in the telecommunications, financial services, and technology industries have
been commanding headlines as these sectors go through dramatic change, both regulatory and
financial. But giant mergers have been occurring in virtually every industry.

M&A business has been consistently brisk, as demands to go global, to keep pace with the
competition, and to expand earnings by any possible means have been foremost in the minds of
CEOs.

When a public company acquires another public company, the target company's stock often
shoots through the roof while the acquiring company's stock often declines. Why? One must
realize that existing shareholders must be convinced to sell their stock. Few shareholders are
willing to sell their stock to an acquirer without first being paid a premium on the current stock
price. In addition, shareholders must also capture a takeover premium to relinquish control over
the stock. The large shareholders of the target company typically demand such an extraction.
For example, the management of the selling company may require a substantial premium to
give up control of their firm.

M&A transactions can be roughly divided into either mergers or acquisitions. These terms are
often used interchangeably in the press, and the actual legal difference between the two
involves arcane of accounting procedures, but we can still draw a rough difference between the
two.

Acquisition - When a larger company takes over another

(smaller firm) and clearly becomes the new owner, the
purchase is called an acquisition. Typically, the target company
ceases to exist post-transaction (from a legal corporation point
of view) and the acquiring corporation swallows the business.
The stock of the acquiring company continues to be traded.
Merger - A merger occurs when two companies, often roughly

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of the same size, combine to create a new company. Such a situation is often called a merger of
equals. Both companies' stocks are tendered (or given up), and new company stock is issued in
its place. For example, both Chrysler and Daimler-Benz ceased to exist when their firms
merged, and a new combined company, DaimlerChrysler was created.

M&A advisory services

For an I-bank, M&A advising is highly profitable, and there are many
possibilities for types of transactions. Perhaps a small private
company's owner/manager wishes to sell out for cash and retire. Or
perhaps a big public firm aims to buy a competitor through a stock
swap. Whatever the case, M&A advisors come directly from the
corporate finance departments of investment banks. Unlike public
offerings, merger transactions do not directly involve salespeople,
traders or research analysts. In particular, M&A advisory falls onto the
laps of M&A specialists and fits into one of either two buckets: seller
representation or buyer representation (also called target
representation and acquirer representation).

Representing the target

An I-bank that represents a potential seller has a much greater likelihood of completing a
transaction (and therefore being paid) than an I-bank that represents a potential acquirer. Also
known as sell-side work, this type of advisory assignment is generated by a company that
approaches an investment bank and asks the bank to find a buyer of either the entire company
or a division. Often, sell-side representation comes when a company asks an investment bank
to help it sell a division, plant or subsidiary operation.

Generally speaking, the work involved in finding a buyer includes writing a Selling Memorandum
and then contacting potential strategic or financial buyers of the client. If the client hopes to sell
a semiconductor plant, for instance, the I-bankers will contact firms in that industry, as well as
buyout firms that focus on purchasing technology or high-tech manufacturing operations.

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Buyout Firms and LBOs

Buyout firms, which are also called financial sponsors, acquire companies by borrowing
substantial cash. These buyout firms (also called LBO firms) implement a management team
they trust, and ultimately seek an exit strategy (usually a sale or IPO) for their investment within
a few years. These firms are driven to achieve a high return on investment (ROI), and focus
their efforts toward streamlining the acquired business and preparing the company for a future
IPO or sale. It is quite common that a buyout firm will be the selling shareholder in an IPO or
follow-on offering.

Representing the acquirer

In advising sellers, the I-bank's work is complete once another party purchases the business up
for sale, i.e. once another party buys your client's company or division or assets. Buy-side work
is an entirely different animal. The advisory work itself is straightforward: the investment bank
contacts the firm their client wishes to purchase, attempts to structure a palatable offer for all
parties, and make the deal a reality. However, most of these proposals do not work out; few
firms or owners are willing to readily sell their business. And because the I-banks primarily
collect fees based on completed transactions, their work often goes unpaid.

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ROLE OF INVESTMENT BANK IN PRIVATE PLACEMENTS

A private placement, which involves the selling of debt or equity to private investors, resembles
both a public offering and a merger. A private placement differs little from a public offering aside
from the fact that a private placement involves a firm selling stock or equity to private investors
rather than to public investors. Also, a typical private placement deal is smaller than a public
transaction. Despite these differences, the primary reason for a private placement - to raise
capital - is fundamentally the same as a public offering.

Why private placements?

As mentioned previously, firms wishing to raise capital often discover that they are unable to go
public for a number of reasons. The company may not be big enough; the markets may not have
an appetite for IPOs, or the company may simply prefer not to have its stock be publicly traded.
Such firms with solidly growing businesses make excellent private placement candidates. Often,
firms wishing to go public may be advised by investment bankers to first do a private placement,
as they need to gain critical mass or size to justify an IPO.

Private placements, then, are usually the province of small companies aiming ultimately to go
public. The process of raising private equity or debt changes only slightly from a public deal.
One difference is that private placements do not require any securities to be registered with the
SEC, nor do they involve a roadshow. In place of the prospectus, I-banks draft a detailed Private
Placement Memorandum (PPM for short) which divulges information similar to a prospectus.
Instead of a roadshow, companies looking to sell private stock or debt will host potential
investors as interest arises, and give presentations detailing how they will be the greatest thing
since sliced bread.

Often, one firm will be the sole investor in a private placement. In other words, if a company
sells stock through a private placement, often only one venture capital firm will buy the stock
offered. Conversely, in an IPO, shares of stock fall into the hands of literally thousands of buyers
immediately after the deal is completed.

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Role:
The investment banker's work involved in a private placement is quite similar to sell side M&A
representation. The bankers attempt to find a buyer by writing the PPM and then contacting
potential strategic or financial buyers of the client.

In the case of private placements, however, financial buyers are venture capitalists rather than
buyout firms, which is an important distinction. A VC firm invests in less than 50 percent of a
company's equity, whereas a buyout firm purchases greater than 50 percent of a company's equity,
thereby gaining control of the firm. Note that the same difference applies to private placements on
the sell-side. A sale occurs when a firm sells greater than 50 percent of its equity (giving up control),
but a private placement occurs when less than 50 percent of its equity is sold.

Because private placements involve selling equity and debt to a single buyer, the investor and
the seller (the company) typically negotiate the terms of the deal. Investment bankers function
as negotiators for the company, helping to convince the investor of the value of the firm.

Fees involved in private placements work like those in public offerings. Usually they are a fixed
percentage of the size of the transaction.

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ROLE OF INVESTMENT BANK IN FINANCIAL RESTRUCTURING

When a company cannot pay its cash obligations - for example, when it cannot meet its bond
payments or its payments to other creditors (such as vendors) - it goes bankrupt. In this
situation, a company can, of course, choose to simply shut down operations and walk away. On
the other hand, it can also restructure and remain in business.

What does it mean to restructure? The process can be thought of as two-fold: financial
restructuring and organizational restructuring. Restructuring from a financial viewpoint involves
renegotiating payment terms on debt obligations, issuing new debt, and restructuring payables
to vendors. Bankers provide guidance to the firm by recommending the sale of assets, the
issuing of special securities such as convertible stock and bonds, or even selling the company
entirely.

From an organizational viewpoint, a restructuring can involve a change in management, strategy

and focus. I-bankers with expertise in "reorgs" can facilitate and ease the transition from
bankruptcy to viability.

I-bankers not only work in securing financing, but may assist in building projections for the client
(which serve to illustrate to potential financiers what the firm's prospects may be), in
renegotiating credit terms with lenders, and in helping to re-establish the business as a going
concern.

Because a firm in bankruptcy already has substantial cash flow problems, investment banks
often charge minimal monthly retainers, hoping to cash in on the spread from issuing new
securities.

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 IPOs

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INTRODUCTION

FINANCIAL MARKETS AND THE IPO

The Financial Market is an amorphous set of players who come together to trade in financial
assets.

Financial Markets in any economic system that acts as a conduit between the organizations who
need funds and the investors who wish to invest their money into profitable opportunity. Thus, it
helps institutions and organizations that need money to have an access to it and on the other
hand, it helps the public in general to earn savings.

Thus they perform the crucial function of bringing together the entries who are either financially
scarce or who are financially slush. This helps generally in a smoother economic functioning
in the sense that economic resources go to the actual productive purposes. In modern economic
systems Stock Exchanges are the epicenter of the financial activities in any economy as this is
the place where actual trading in securities takes place.

As such, Financial Markets are functionally classified as having two parts, namely,

1. The Primary Market

2. The Secondary Market

Primary Market comprises of the new securities which are offered to the public by new
companies. It is the mechanism through which the resources of the community are mobilized
and invested in various types of industrial securities. Whenever a new company wants to enter
the market it has to first enter the primary market.

Secondary Market comprises of further issues which are floated by the existing companies to
enhance their liquidity position. Once the new issues are floated and subscribed by the public
then these are traded in the secondary market. It provides easy liquidity, transferability and
continuous price formation of securities to enable investors to buy and sell them with ease. The
volume of activity in the Secondary Market is much higher compared to the Primary Market

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PRIMARY MARKET - GENESIS AND GROWTH

When a business entity needs money the general course of action that it follows is that it goes to
the bank. However banks may not be ready to provide huge finance for a long time especially if
the returns are not fixed. The best way to raise money is through offer of shares and for this:
PRIMARY MARKET is the answer.

The Primary Market deals with the new securities which were previously not tradeable to the
public. The main function is to facilitate the transfer of resources from savers to entrepreneurs
seeking to establish or to expand and diversify existing events. The mobilization of funds
through the Primary Market is adopted by the state government and corporate sector. In other
words the Primary Market is an integral part of the capital market of a country and together with
the securities market. The development of security as well as the scope for higher productive
capacity and social welfare depends upon the efficiency of the Primary Markets.

HISTORY OF PRIMARY MARKET

Indian capital market was initiated with establishing the Bombay stock exchange in the year
1875. At that time the main function of stock exchange was to provide place for trading in the
stocks. Now the exchange has completed more than 25 years. It has undergone several
changes.

Initially the IPO was called New Issue and the issues in the Primary Market were controlled by
CCI (Controller of capital issue). It was working as a department of MOF (ministry of finance).
There were very few issues every year. CCI was highly conservative and hardly allowed any
premium issues. Also, the regulatory framework was inadequate to control several issues
relating to Primary Market. Therefore, in the year 1992 it was abolished.

There was no awareness of new issues among the investing public. In fact, during 1950s-1960s,
the investment in stock market was considered to be gambling. It was prerogative to highly elite
business community to participate in new issues. More than 99% of Indian population never
participated in any issue during CCI regime.

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There was tremendous growth in capital market in U.S.A. and Western Europe. In these
markets they had established Security Exchange Commission (SEC). It is most powerful
autonomous body. The Government of India realized the importance of a similar body in India
for healthy and fast growth of Capital Market. Thus Security Exchange Board of India (SEBI)
was established with headquarters in Mumbai in 1992.SEBI is the most powerful body in India.

SEBI has come up with the guidelines for disclosures and investors protection. SEBI has framed
rules for various intermediaries like Merchant Bankers, Underwriters, Brokers, Bankers,
Registrars and Transfer Agents, Depositories, Stock Exchanges etc. These rules are on the line
of similar rules in western world. This has attracted foreign institutional and individual investors
to invest money in India. This has resulted in exponential growth of Capital Market in this last
decade.

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IPO DEFINED

The first public offer of securities by a company after its inception is known as Initial Public
Offering (IPO). Going public (or participating in an initial public offering or IPO) is a process by
which a business owned by one or several individuals is converted in to a business owned by
many. It involves the offering of part ownership of the company to the public through the sale of
equity securities (stock).

IPO dilutes the ownership stake and diffuses corporate control

as it provides ownership to investors in the form of equity
shares. It can be used as exit strategy and finance strategy.

As a financing strategy, its main purpose is to raise funds for

the company. When used as an exit strategy, existing investors
can offload equity holdings to the public.

REASONS FOR GOING PUBLIC

To raise funds for financing capital expenditure needs like expansion diversification etc.

To finance increased working capital requirement

As an exit route for existing investors
For debt financing.

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ADVANTAGES OF GOING PUBLIC

Stock holder Diversification

Easier to raise new capital
Enhances liquidity
Establishes value for the firm
Image
Other advantages

DISADVANTAGES OF GOING PUBLIC

Cost of Reporting
Disclosure
Self dealings
Inactive market low price
Control

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PRICING OF ISSUE

Controller Of Capital Issue

During the Controller of Capital Issue (CCI) regime the issues were priced by the company and
approved by CCI. Generally the CCI was very conservative and hardly allowed premium issues.

Arrival of SEBI
After the Arrival of SEBI free market policy is followed for
pricing of issue. Merchant Bankers are responsible for
justifying the premium. The company was allowed to give
future profit projections. A company can issue shares to
applicants in the firm allotment category at higher price than
the price at which securities are offered to public. Further, an
eligible company is free to make public/rights issue in any
denomination determined by it in accordance with the
Companies Act, 1956 and SEBI norms.

Deciding Premium by Bid System

Since year 2000 SEBI has changed pricing formula. The promoters cannot give future
projections and merchant banker alone cannot decide the pricing of IPO.

At present, 50%of the IPO is reserved for the wholesale investors and 50% is for the small
investor. The Lead-Manager starts road show in consultation with Institutional Investors. Then
they call for bid at recommended prices. Once, bids are received pricing is open for discussion.
The mean bid price is accepted and allocation is done.

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BOOK BULIDING - THE LATEST AVTAAR OF PRICE DISOVERY

The basic motto of Book Building is that the market knows the best. Ever since SEBI allowed
companies with no profitability record to come up with IPO via Book Building route, there has
been a good rush of such issues.

What is Book Building?

Book Building is basically a capital issuance process used in Initial Public Offering (IPO), which
aids price and demand discovery. It is a process used for marketing a public offer of equity
shares of a company and is a common practice in most developed countries. Book Building is
so-called because the collection of bids from investors is entered in a "book". These bids are
based on an indicative price range. The issue price is fixed after the bid closing date.

Persons Involved in the Book-Building Process

The principal intermediaries involved in the Book Building process are the company; Book
Running Lead Managers (BRLM) and syndicate members who are intermediaries registered
with SEBI and are eligible to act as underwriters. Syndicate members are appointed by the
BRLM.

How is the book built?

A company that is planning an initial public offer appoints a category-I Merchant Banker as a
book runner. Initially, the company issues a draft prospectus which does not mention the price,
but gives other details about the company with regards to issue size, past history and future
plans among other mandatory disclosures. After the draft prospectus is filed with the SEBI, a
particular period is fixed as the bid period and the details of the issue are advertised. The book
runner builds an order book, that is, collates the bids from various investors, which shows the
demand for the shares of the company at various prices. For instance, a bidder may quote that
he wants 50,000 shares at Rs.500 while another may bid for 25,000 shares at Rs.600.
Prospective investors can revise their bids at anytime during the bid period that is, the quantity
of shares or the bid price or any of the bid options.

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Basis of Deciding the Final Price

On closure of the book, the quantum of shares ordered and the respective prices offered are
known. The price discovery is a function of demand at various prices, and involves negotiations
between those involved in the issue. The book runner and the company conclude the pricing
and decide the allocation to each syndicate member.

Payment for the shares

The bidder has to pay the maximum bid price at the time of bidding based on the highest bidding
option of the bidder. The bidder has the option to make different bids like quoting a lower price
for higher number of shares or a higher price for lower number of shares. The syndicate
member may waive the payment of bid price at the time of bidding. In such cases, the issue
price may be paid later to the syndicate member within four days of confirmation of allocation.
Where a bidder has been allocated lesser number of shares than he or she had bid for, the
excess amount paid on bidding, if any will be refunded to such bidder.

Advantage of the Book Building process versus the Normal IPO marketing process

Unlike in Book Building, IPOs are usually marketed at a fixed price. Here the demand cannot be
anticipated by the merchant banker and only after the issue is over the response is known. In
book building, the demand for the share is known before the issue closes. The issue may be
deferred if the demand is less. This process allows for price and demand discovery. Also, the
cost of the public issue is reduced and so is the time taken to complete the entire process.

Features Fixed Price Process Book Building Process

Price at which the Security will be

Price at which the Security is
offered/allotted is not known in
Pricing offered/allotted is known in advance
advance to the investor. Only an
to the investor.
indicative price range is known.

Demand for the securities offered is Demand for the securities offered
Demand known only after the closure of the can be known everyday as the book
issue. is built.

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MARKETING OF IPO

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MARKETING OF IPO

PRELIMINARY REQUIREMENTS

The company has to complete all legal requirements, appoint all intermediaries and once they
get SEBI card (approval), the process of marketing of IPO can commence.

TIMING OF IPO

This the most important factor for the success of IPO. If, secondary market is depressed, if there
is political unrest, if serious international problems are prevailing then it is considered to be
negative factors for timing of IPOs. If these factors are favorable then the Company must find
out about the timing of other prestigious IPOs.

GENERAL PROCEDURE FOR MARKETING OF IPO

PRESS CONFERENCE: Promoters and Lead Managers call for press conference in each major
investment center. Reporters are briefed about the issue. They carry it as news-item in their
papers.

INVESTORS CONFERENCE: The prospective investors are called by invitation. The Promoters
and Lead Managers give presentations. They reply to the questions of the investors to boost
their confidence.

ROAD-SHOW: This is like the investors conference but normally is done abroad for marketing
ADR/GDR issues. It is an expensive process and requires a lot of legal compliances. The
company has to observe the rules of the concerned country. However, road shows are
becoming more and more popular in India.

NEWSPAPER ADVERTISEMENT: The company releases statutory advertisements in leading

newspapers. The company has to publish abridges prospectus in leading newspapers. It is the
responsibility of the promoters to ensure that the issuing company and their group companies
should not release any commercial advertisement, which may influence the investors decision
for investment.

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34
BRIEF NOTE ON INTERMEDIARIES

MERCHANT BANKERS
Eligibility criteria-SEBI issues an authorization letter to the finance companies, which are eligible
to work as merchant bankers. The eligibility criteria depend on network and infrastructure of the
company. The company should not be engaged in activities that are banned for merchant
bankers by SEBI. SEBI issues authorization letter valid for 3 years and the company has to pay
necessary fees. Such merchant banker can be appointed as lead manager for IPO.

Responsibility- lead managers are fully

responsible for the content and Size of the Issue No of Lead Managers
correctness of the prospectus. They must
50 cr. 2
ensure the commencement to the
completion of the IPO. Certain guidelines 50-100 cr. 3
are laid down in section 30 of the SEBI
100-200 cr. 4
act 1992 on the maximum limits of the
intermediaries associated with the issue. 200-400 cr. 5

The number of co managers should not Above 400 cr. 1 or more as agreed by
exceed the number of lead managers. the board
There can be only 1 adviser to the issue.
There is no limit on the number of underwriters.

BROKERS
All the recognized stock exchange members are called brokers and A broker offer marketing
support, underwriting support, disseminates information to investors about the issue and
distributes issues stationary at retail investor level. The brokers are governed by rules of SEBI
and the respective stock exchange. The brokers are key to the success of the issue. The
brokers appoint sub brokers who are in direct contact with the investors.

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UNDERWRITERS

The underwriter is the principle player in the IPO providing the firm with-

Reputation-as the underwriter is legally liable and because he has on going dealing with the
customers to whom he sells shares. The underwriter puts his reputation on the line.

Underwriting involves a commitment from the underwriter to subscribe to the shares of a

particular company to the extent it is under subscribed by the public or existing shareholders of
the corporate. An underwriter should have a minimum net worth of 20 lakhs and his total
obligation at any time should not exceed 20 times his net worth. A commission is paid to the
writers on the issue price for undertaking the risks of under subscription. The maximum rate of
underwriting commission paid is as follows.

On amount On amounts
Nature of Issue Devolving on subscribed by the
Underwriters public

Equity shares
preference shares 2.5% 2.5%
and Debentures

Issue amount upto

2.5% 2.5%
Rs5 lakhs

Issue amount
2.0% 1.0%
exceeding %

The fees for underwriter and broker are decided by the company within the maximum possible
limit as fixed by the SEBI.

BANKERS TO THE ISSUE

Any scheduled bank registered with SEBI can be appointed as the banker to the issue. They get
fees on amount collected by them. There are no restrictions on the number of bankers to the
issue. The main function of banker involves collection of duly filed application forms with

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money (cheque/drafts) maintains a daily report, transferring the proceeds to the share
application money collected with the application forms to the registrar.

REGISTRAR AND TRANSFER AGENTS

Registration with SEBI is mandatory to take on responsibilities as a registrar or share transfer
agent. The registrar provides administrative support to the issue process. Each agent is
registered with SEBI. Hey have to maintain net worth and infrastructure criteria. They have to
renew their License periodically. He collects all application from the bank and ensures
reconciliation of funds and of application amount and participates in process of basis of
allotment. If the IPO is oversubscribed they provide computerized program for allotment. They
manage refund orders and allotment letters. They provide the final list of allotees to Lead
Manager ROC and stock exchange. If the company wants they also manage post issue IPO
functions relating to shareholders register for the company.

DEPOSITORIES
Since the year 2000 its compulsory that all fresh issue of shares must be made only in the
dematerialized format (DMAT). The Depository institute issues unique number of every IPO or
company, when shares are allotted to the company/registrar provides shareholders register to
depository in electronic form. Thus automatically all shareholders get allotment in their DMAT
account.

LEGAL ADVISOR
Normally the company for the purpose of IPO does this appointment. He is responsible legal
compliance of IPO process. There are other intermediaries like Advertising Agents etc. but the

company governs their role.

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38
SEBI AND IPO

ELIGIBILITY NORMS

FOR UNLISTED COMPANIES

It should have a pre issue network of a minimum amount of Rs1 crore in 3 out of the
preceding 5 financial years. In addition the company should compulsorily need the
minimum network level during the two immediately preceding years.
It should have a track record distributable profits as given in section 205 of companies
act 1956 for at least 3 years in the preceding 5 years period.
The issue size (i.e. Offer + Form allotment + Promoters contribution through the offer
document) should not exceed an amount equal to 5 times its pre issue worth.

FOR LISTED COMPANIES

It should have a track record distributable profits as given in section 205 of companies
act 1956 for at least 3 years in the preceding 5 years period.
It should have a pre issue network of a minimum amount of Rs1 crore in 3 out of the
preceding 5 financial years with the minimum net worth to be met during the immediately
preceding 2 years.

SEBI NORMS

SEBI has come up with Investor Protection and Disclosure Norms for raising funds through IPO.
These rules are amended from time to time to meet with the requirement of changing market
conditions.

Disclosure Norms

Risk Factor-The Company/Merchant Banker must specify the major risk factor in the
front page of the offer document.
General Risk.-Attention of the investor must be drawn on these risk factors.
Issuers Responsibility-It is the absolute responsibility of the issuer company about the
true and correct information in the prospectus. Merchant Banker is also responsible for
giving true and correct information regarding all the documents such as material
contracts, capital structure, appointment of intermediaries and other matters.

39
 Listing Arrangement- It must clearly state that once the issue is subscribed where the
shares will be listed for trading.
Disclosure Clause- It is compulsory to mention this clause to distinctly inform the
investors that though the prospectus is submitted and approved by SEBI it is not
responsible for the financial soundness of the IPO.
Merchant Bankers Responsibility-Disclaimer Clause the Lead Manager has to certify
that disclosures made in the prospectus are generally adequate and are in conformity
with the SEBI Guidelines.
Capital Structure- The company must give complete information about the Authorised
capital, Subscribed Capital with top ten shareholders holding pattern, Promoters interest
and their subscription pattern etc. Also about the reservation in the present issue for
Promoters, FII`s, Collaborators, NRI`s etc. Then the net public offer must be stated very
clearly.
Auditors Report- The Auditors have to clearly mention about the past performances,
Cost of Project, Means of Finance, Receipt of Funds and its usage prior to the IPO.
Auditor must also give the tax-benefit note for the company and investors.

Investor Protection Norms

Pricing of Issue-The pricing of all the allocations for the present issue must follow the
bid system. The reservation must be disclosed for different categories of investors and
their pricing must be specified clearly.
Minimum Subscription- If the company does not receive minimum subscription of 90%
of subscription in each category of offer and if the issue is not underwritten or the
underwriters are unable to meet their obligation, then fund so collected must be
refunded back to all applicants.
Basis of Allotment- In case of full subscription of the issue, the allotment must be made
with the full consultation of the concerned stock exchange and the company must be
impartial in allotting the shares.
Allotment/Refund- Once the allotment is finalized, the refund of the excess money must
be made within the specified time limits otherwise the company must pay interest on
delayed refund orders.
Dematerialisation of Shares-As per the provisions of the Depositories Act, 1996, And
SEBI Rules, now all IPO will be in Demat form only.

40
 Listing of Shares- It is mandatory on the part of the promoters that once the IPO is fully
subscribed, and then the underlying shares must be listed on the stock exchange. This
provides market and exit routes to the investors.

The above are the major Guidelines for the Investor Protection and Disclosure Norms. The
SEBI has provided rules for every possible situation.

SEBI GUIDELINES

IPO of Small Companies

Public issue of less than five crores has to be through OTCEI (Over the Counter Exchange of
India) and separate guidelines apply for floating and listing of these issues.

Public Offer of Small Unlisted Companies (Post-Issue Paid-Up Capital upto Rs.5 crores) Public
issues of small ventures which are in operation for not more than two years and whose paid up
capital after the issue is greater than 3 crores but less than 5 crores the following guidelines
apply.

Securities can be listed where listing of securities is screen based.

If the paid up capital is less than 3 crores then they can be listed on the Over The
Counter Exchange of India (OTCEI)
Appointment of market makers mandatory on all the stock exchanges where securities
are proposed to be listed.

Size of the Public Issue

Issue of shares to general public cannot be less than 25%of the total issue. Incase of IT, Media
and Telecommunication sectors, this stipulation is reduced subject to the conditions that:

Offer to the public is not less than 10% of the securities issued.
A minimum number of 20 lakh securities is offered to the public
Size of the net offer to the public is not less than Rs.30 crores.

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Promoters Contribution

1. Promoters should bring in their contribution including premium fully before the issue
2. Minimum promoters contribution is 20-25% of the public issue.
3. Minimum lock in period for promoters contribution is five years.
4. Minimum lock in period for firm allotment is three years.

Collection Centers for Receiving Applications

There should be at least 30 mandatory collection centers, which should include

invariably the places where stock exchanges have been established.
For issues not exceeding Rs.10 crores the collection centers shall be situated at:-o
The 4 metropolitan centres viz. Mumbai Delhi Calcutta Chennai
o All such centres where stock exchanges are located in the region in which the
registered office of the company is situated.

Regarding allotments of shares

Net Offer the general public has to be atleast 25% of the total issue size for listing on a
stock exchange
It is mandatory for a company to get its shares listed at the regional stock exchange
where the registered office of the issuer is located.
In an issue of more than 25 crores the issuer is allowed to place the whole issue by
book-building.
Minimum of 50% of the Net Offer to the public has to be reserved for the investors
applying for less than 1000 shares.
There should be atleast 5 investors for every 1 lakh equity offered.
Quoting of PAN or GIR No. in application for the allotment of securities is compulsory
where monetary value of investment is Rs.50000/- or above.
Indian development financial institutions and Mutual Fund can be allotted securities upto
75% of the issue amount.
A venture capital fund shall not be entitled to get its securities listed on any stock
exchange till the expiry of 3 years from the date of issuance of securities.

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 Allotment to categories of FIIs and NRIs/OCBs is upto maximum of 24%, which can be
further extended to 30% by an application to the RBI-supported by a resolution passed
in the General Meeting.

Timeframes for Issue and Post-Issue Formalities

The minimum period for which the public issue is to be kept open is 3 working days and
the maximum for which it can be kept open is 10 working days. The minimum period for
right issue is 15 working days and the maximum is 60 working days.
A public issue is effected if the issue is able to procure 90% of the total issue size within
60 days from the date of the earliest closure of the public issue.
In case of oversubscription the company may have he right to retain the excess
application money and allot shares more than the proposed issue, which is referred to as
green-shoe option
Allotment has to be made within 30 days of the closure of the Public issue and 42 days
in case of Rights issue
All the listing formalities of a Public Issue have to be completed within 70 days from the
date of closure of the subscription list.

Dispatch of Refund Orders

Refund orders have to be dispatched within 30 days of the closure of the issue.
Refunds of excess application money i.e. non-allotted shares have to be made within 30
days of the closure of the issue.

Other Regulations

Underwriting is not mandatory but 90% subscription is mandatory for each issue of
capital to public unless it is disinvestment where it is not applicable.
If the issue is undersubscribed then the collected amount should be returned back
If the issue size is more than Rs500 crores, voluntary disclosures should be made
regarding the deployment of funds and an adequate monitoring mechanism put in place
to ensure compliance.

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 There should not be any outstanding warrants for financial instruments of any other
nature, at the time of the IPO.
In the event of the initial public offer being at a premium and if the rights under warrants
or other instruments have been exercised within 12 months prior to such offer, the
resultant shares will be not taken into account for reckoning the minimum promoters
contribution further, the same will also be subject to lock-in.
Code of advertisement as specified by SEBI should be adhered to
Draft prospectus submitted to SEBI should also be submitted simultaneously to all stock
exchanges where it is proposed to be listed.

Restrictions on Allotments

Firm allotments to mutual funds, FII and employees are not subject to any lock-in period.

Within 12 months of the public issue no bonus issue should be made.

Maximum percentage of shares, which can be distributes to employees cannot be more
than 5% and maximum shares to be allotted to each employee cannot be more than
200.

Relaxation of entry norms for infrastructure companies

With a view channelise greater flow of funds to infrastructure companies, SEBI granted a
number of relaxations to infrastructure companies. These included:

Exemption from the requirement of making a minimum public offer of 25 percent of

securities and also from the requirement of 5shareholders per Rs.1 lakh of offer made.
Exemption from the minimum subscription of 90 per cent provided disclosure is made
about the alternate source of funding considered by the company, in the event of under-
subscription in the public issue.
Permission to keep the issues open for 21 days to enable the companies to mobilize
funds.
Exemption from requirement to create and maintain a debenture redemption reserve in
case of debenture issues as provided in the SEBI Disclosure & Investor Protection
Guidelines.

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FUTURE OF INVESTMENT BANKING

Investment banks have played and will continue to play a very crucial role in market transactions
on behalf of investors, government and corporations.

Only when the tide goes out do you discover who's been swimming naked.

These were the famous words of Warren Buffett, regarding the downfall of economic system and
investment banking. After the world faced a major economic recession in the second half of 2008,
many scholars and think tanks were skeptical about the restoration of the economy. However, as
the market has its own share of ups and downs, the positive aspects and financial strength of
investment banks cannot be neglected. The future of investment banking might comprise the
following:

More Stringent Laws and Restrictions

After considering the Wall Street crash and the credit crisis in America, it is very much possible
that the regulators and politicians will impose stringent laws and restrictions on investment banks.
The laws and restrictions will be made with an intention to curtail the aggressive market strategies
of these banks, as well as to come up with a better risk management scheme.

Claw-back Provisions

In order to make the volatile market of investment banking more secured from crashes caused by
imprudent individual traders or groups, banks may tighten up the claw-back provisions. This
provision requires those whose trades cause subsequent losses, to pay back all or part of their
bonuses. However, this might result in the transition of traders from big names to less well-known
boutiques, in order to avoid scrutiny.

Emphasis on Equity Derivatives and Currency trading

An equity derivative is an instrument used by investors to hedge the risks associated with taking
a position in stocks. It consists of underlying assets based on equity securities and limits the
losses incurred by either a short or long position in a company's shares. In order to derive more
benefits, investment banks will be emphasizing more on currency trading, interest-rate products,
equity derivatives and corporate restructuring.

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Fewer big banks and more small boutiques

As the giant investment banks faced heavy losses, which in turn affected the government and
investors, in future there will be fewer big banks and more boutiques. This will force the big shot
investment banks to be careful about their position, as they will face stiff competition from small
firms. In any case, the charm of investment banks is something which will not decrease in near
future.

Lesser Dependence on Short-Term Funding

Considering the negative impact of the aggressive strategies of investment banks, in future, there
might be lesser dependence on short-term funding and high leverage. As the investment banks
are largely financed with short-term funding, a massive asset/liability mismatch is created which is
difficult to manage. It is also probable that more investment banks will be pushed into the arms of
banking acquirers with large and stable deposit bases. This will provide solution to the investment
banks which are generally financed for the good times, not the bad ones.

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CONCLUSION:

Thus we see that, an initial public offering (IPO) is the first sale of stock by a company to
the public. Broadly speaking, companies are either private or public. Going public means
a company is switching from private ownership to public ownership. Going public raises
cash and provides many benefits for a company. The process of underwriting involves
raising money from investors by issuing new securities. Companies hire investment
banks to underwrite an IPO. The road to an IPO consists mainly of putting together the
formal documents for the Securities and Exchange Commission (SEC) and selling the
issue to institutional clients.

Lock-up periods prevent insiders from selling their shares for a certain period of time. The
end of the lockup period can put strong downward pressure on a stock. Road shows and
red herrings are marketing events meant to get as much attention as possible.

To conclude, Investment banking is a field of banking that aids companies in acquiring

funds. In addition to the acquisition of new funds, investment banking also offers advice
for a wide range of transactions a company might engage in.

Through investment banking, an institution generates funds in two different ways. They
may draw on public funds through the capital market by selling stock in their company,
and they may also seek out venture capital or private equity in exchange for a stake in
their company. An investment banking firm also does a large amount of consulting.
Investment bankers give companies advice on mergers and acquisitions, for example.
They also track the market in order to give advice on when to make public offerings and
how best to manage the business' public assets. Some of the consultative activities
investment banking firms engage in overlap with those of a private brokerage, as they will
often give buy-and-sell advice to the companies they represent.

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BIBLIOGRAPHY

Books and Magazines-

Indian Capital Markets

Financial management Prasanna Chandra
Business World

Websites-

www.indiainfoline.com
www.sify.com
www.moneycontrol.com
www.bseindia.com
www.nseindia.com
www.sebi.gov.in
www.domain-b.com
www.business-standard.com
www.google.com

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