Corporate Finance

INTRODUCTION TO IPO
The first public offering of equity shares of a company, which is followed by

listing of its shares on the stock market, is called the Initial Public Offer.
Through this process a privately held company is transformed into a public

company.
An IPO is often considered an important milestone in a company's lifecycle

marking its transition from a small closely held company to a listed company
Eligibility Of AN IPO
The company should have net tangible assets of at least Rs.3 crore
Net worth of the company should be at least Rs. 1 crore
Minimum earning before tax of Rs. 15 crore in 3 out of preceding 5 years on a consolidated basis.
If a company fails in any of the above criteria it can still be allowed to make ipo through book building.
Book building would involve 75% issue size being allotted to the QIB ( Qualified Institutional Buyers)
SHARE ISSUE PRICING METHODS
01 02 03
Fixed Price- The price at which Book Building - The price band French Auction - In this the
shares are to be issued is fixed is decided within which the retail investors are free to bid at
with the help of merchant investors are required to bid for the floor price but the
banker before the issue opens the shares. The lowest price is institutional investor have to
for subscription. called the floor price and bid at higher price.
highest is called the cap price in
the range.
STEPS INVOLVED IN IPO
Approval of the proposal A merchant banker is

Approval of shareholders
to raise capital from the appointed as the lead
under the companies act
public by the board of manger to control all the
to make the public issue
directors. issues related to IPO
ROLE OF THE MERCHANT BANKER
Carries out responsibility to check out all relevant information, documents,

certificates for the issue.
Advice company to appoint various parties like the registrar, bankers, printers and
advertiser.
Prepares the red herring document which is a first or preliminary prospectus,

submitted by a company (issuer) as part of a public offering of securities.
Draws up the issue budget including all the expenses like fee for lead manager,
underwriters, registrar, bankers, brokerage, postage, printing advertisement etc.
ROLE OF THE MERCHANT BANKER
Files the draft prospectus, approved by the board with SEBI for its observation.
The company makes listing application to all the stock exchanges where the shares are
proposed to be listed along with copies of draft prospectus.
Files the prospectus with the Registrar of Companies (ROC)
The Company along with lead manager markets the issue with press, brokers and
investors meeting involving advertisement 10 days prior to issue opening
ADVANTAGES OF AN
IPO
• Capital Access
• Increased Recognition
• Liquidity for Shareholders:
• Reduced Cost of Capital
• Employee Incentives
DISADVANTAGE
S OF AN IPO
• High Costs
• Increased Scrutiny
• Short-Term Pressure
• Loss of Control
• Disclosure Requirements
BUYBACK OF SHARES
• The repurchase of outstanding shares
(repurchase) by a company in order to reduce
the number of shares on the market.
INTRODUCTION Companies will buy back shares either to

increase the value of shares still available
(reducing supply), or to eliminate any threats
by shareholders who may be looking for a
controlling stake.
Sources of Buyback , Section 77A (1), Provisions
under Companies Act, 1956
Buyback can be done either out of

• Its free reserves
• Security premium account
• Proceeds of any shares or other specified
securities
Conditions to be fulfilled U/S 77A (2)
Company is allowed to purchase its own shares or other specified securities unless:-
1. The buyback is authorized by its articles
2. A special resolution has been passed in general meeting of the company authorizing the buyback
3. The buyback is less than twenty-five per cent of the total paid capital and free reserves of the company
4. The ratio of the debt owed by the company is not more than twice the capital and its free reserves after such
buyback
5. All the shares or other specified securities for buyback are fully paid up
6. The buyback is in accordance with the regulations made by the SEBI in this behalf
7. Every Buyback shall be completed within 12 months from the date of passing the special regulation.
Methods of Buyback U/S 77A (5)
• From the existing shareholders on a proportionate basis

•From the open market
•From odd lots
•By purchasing the securities issued to the employees of the company under ESOS
SEBI GUIDELINES
• Company is required to make Public announcement in One NATIONAL English Daily, One Hindi National
Daily, One Regional Language Daily
• Public announcement should specify Specified Date i.e. the date of dispatch of the offer letter not later than
30 days but not later than 42 days
• Company should inform SEBI within 7 days, Offer shall remain open at least for 15 days
• Company shall complete verification with in 15 days from the date of closure
• Buyback is permitted through six routes, namely the tender route, open offer route, reverse book building,
odd-lot share purchase, reverse rights and purchase of employee stock option
Objectives of Buy Back
•To increase promoters holding

•Increase earningS per share
•Rationalise the capital structure by writing off capital not represented by available assets.
•Support share value
•To pay surplus cash not required by business In fact the best strategy to maintain the share price in a bear run
is to buy back the shares from the open
•Market at a premium over the prevailing market price.
ADVANTAGES OF BUYBACK OF SHARES
• Helps company in reducing its share capital which Results in lower capital base
• Company has advantage of servicing reduced capital base with higher dividend yield
• It is a good check on companies having poor liquidity position
• Provides capital appreciation to investors
• Gives signal to market that shares are undervalued
• Helps promoters to formulate an effective defence strategy against hostile takeover bids
DISADVANTAGES OF BUYBACK OF SHARES
• Buyback implies under valuation of companies stock

• There exists less or no scope for further expansion
• Clever way for managers to invest cheaply in a company
• It does not make difference to shareholders, whether the company returns cash in the form of increased
dividend or by way of repurchase

Corporate Finance

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INTRODUCTION TO IPO

The first public offering of equity shares of a company, which is followed by

Through this process a privately held company is transformed into a public

An IPO is often considered an important milestone in a company's lifecycle

Net worth of the company should be at least Rs. 1 crore

Approval of the proposal A merchant banker is

Carries out responsibility to check out all relevant information, documents,

Prepares the red herring document which is a first or preliminary prospectus,

Files the prospectus with the Registrar of Companies (ROC)

INTRODUCTION Companies will buy back shares either to

Buyback can be done either out of

• From the existing shareholders on a proportionate basis

•To increase promoters holding

• Buyback implies under valuation of companies stock

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