What is Initial Public Offering(IPO)?
- If a Closely Held Company whose all shares are held by Promoters and now wants to raise some money by selling his company part(shares) without registering in share market known as Initial Public Offering(IPO).
- Merchant Banking Company or Investment Banking Company evaluates the health of the company and decides the share of the company.
- Therefore an application known as Draft Red Herring prospectus is signed with Securities and Exchange Board Of India(SEBI).
- Once the permission is granted, company will come with advertisement then interested investor can buy those shares.
- Therefore a date will be decided and company will be listed in stock exchange.
- If shares are oversubscribed in Initial Public Offering(IPO) then 15% more shares will be released known as Green Shoe Option.
- If shares are unsubscribed known as underwriting of shares. In this case Merchant Banking will buy these shares known as Lead Bank in this process.
What Is Securities and Exchange Board of India (SEBI)?
SEBI is a statutory body and a market regulator, which controls the securities market in India. The basic functions of Securities and Exchange Board Of India(SEBI) is to protect the interests of investors in securities and to promote and regulate the securities market. Securities and Exchange Board Of India(SEBI) is run by its board of members. The board consists of a Chairman and several other whole time and part time members. The chairman is nominated by the union government. The others include two members from the finance ministry, one member from Reserve Bank of India and five other members are also nominated by the Centre. The headquarters of SEBI is situated in Mumbai and the regional offices are located in Ahmedabad, Kolkata, Chennai and Delhi.
History of Securities and Exchange Board of India (SEBI)
Before Securities and Exchange Board Of India(SEBI) came into existence, Controller of Capital Issues was the regulatory authority; it derived authority from the Capital Issues (Control) Act, 1947. In 1988, SEBI was constituted as the regulator of capital markets in India. Initially, SEBI was a non-statutory body without any statutory power. Following the passage of the SEBI Act by Parliament in 1992, it was given autonomous and statutory powers.
What is Securities Appellate Tribunal (SAT)
SEBI also appoints various committees, whenever required to look into the pressing issues of that time. Further, a Securities Appellate Tribunal (SAT) has been constituted to protect the interest of entities that feel aggrieved by SEBI’s decision. SAT consists of a presiding officer and two other members.
Functions and powers of SEBI
Securities and Exchange Board Of India(SEBI) controls activities of stock exchanges, safeguards the rights of shareholders and also guarantees the security of their investment. It also aims to check fraudulence by harmonizing its statutory regulations and self-regulating business. The regulator also enables a competitive professional market for intermediaries
Apart from the above functions, SEBI provides a marketplace in which the issuers can increase finance properly. It also ensures safety and supply of precise and accurate information from the investors. SEBI analyses the trading of stocks and safes the security market from the malpractices. It controls the stockbrokers and sub- stockbrokers. It provides education regarding the market to the investors to enhance their knowledge.
What is Draft Red Herring prospectus?
A draft red herring prospectus (DRHP), or offer document, is the preliminary registration document prepared by merchant bankers for prospective IPO-making companies in the case of book building issues. The document includes information about the company’s business operations, promoters, financials, its standing in the industry it deals in and listed or unlisted peers.
The document clarifies the reason why the company wants to raise money from the public, how the money will be used and risks involved in investing in the company. It does not contain details of either price or number of shares being offered or the amount of issue. This means that in case price is not disclosed, the number of shares and the upper and lower price bands are disclosed. On the other hand, an issuer can state the issue size and the number of shares are determined later.
The price cannot be determined until the bidding process is completed. In case of book-built issues, such details are not shown in the red herring prospectus filed with ROC in terms of the provisions of the Companies Act.
The role of the merchant banker, in this case, is to take care of the legal compliance issues and ensure that prospective investors are aware and kept in the loop of public issue.
Securities and Exchange Board Of India(SEBI) reviews the draft document and checks if adequate disclosures are made. It gives its observations to the merchant bankers, who make the required changes and file the final offer document with SEBI, the ROC and stock exchanges.
The final document is reviewed, and observations if made, are to be implemented.
What is a Green-shoe Option?
Under a green shoe option, the issuing company has the option to allocate additional equity shares up to a specified amount.
A Green Shoe Option allows the underwriter of a public offer to sell additional shares to the public if the demand is high.
The option is a clause in the underwriting agreement, which allows the company to sell additional shares, usually 15 per cent of the issue size (in case of Initial Public Offering(IPO)), to the public if the demand exceeds expectations and the stock trades above its offer price.
What Is a Merchant Bank?
The term merchant bank refers to a financial institution that conducts underwriting, loan services, financial advising, and fundraising services for large corporations and high-net-worth individuals (HWNIs). Merchant banks are experts in international trade, which makes them specialists in dealing with multinational corporations. Unlike retail or commercial banks, merchant banks do not provide financial services to the general public. Some of the largest merchant banks in the world include J.P. Morgan Chase, Goldman Sachs, and Citigroup.
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