Appointment of book runner.

The first step for Venkatesh is to appoint the lead investment banker also called Book Running Lead Manager (BRLM). The lead investment banker conducts due diligence i.e. they propose the size of the capital issue that must be conducted by the company. Then they also propose a price band, which is a range of price where bids can be placed, for the shares to be sold..

 

· Register with Securities Exchange Commision.

The Company formed by Venkatesh and the under-writers, under the guidance of BRLM together, file the registration statement, which comprises of all the last 5 year fiscal data and business plans of the company. It will also have to ensure it has given in dept analysis of how the company is going to utilise the funds raised from the IPO                                                .

· Issue of Red herring Prospectus.

If the management agrees with the propositions of the investment banker, the Red Herring prospectus is issued with the price range or band as suggested by the investment banker. The lower end of the price range is known as the floor price whereas the higher end is known as the ceiling price. As per the law the ceiling price cannot be more than 120% of the floor price. The final price at which securities are indeed offered for sale to the general public after the entire book building process is called the cut-off price

 

· Bidding by the public.

Investors in the market are requested to bid within the said band to buy the shares. They are requested to bid the number of shares that are in multiples of the said share bunch. These bids along with the said application money are submitted to the investment bankers.

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· Price Discovery

Once all the bids have been submitted by the public and collected by BRLM, they begin the process of price discovery. The final cut off price of Venkatesh’s Ccompany is chosen via either of 2 main methods

1. Dutch Auction Method

Under this method, bids are arranged in a highest to lowest bid price. Then when the number of the cumulative shares is equal to (or just more than) the number of shares issued then it stops there, and that price is taken as the cut of price.

 

Lets say for example Venkatesh is issuing 100 share at a price band of Rs 465 to 500

And there are say five investors who put forth their bids. Then their bids will be arranged in desending order in respect of share price as follows

 

Investor	No of Shares Bid	Cumulative No of Shares Bid	Bid Price
A	15	15	500
B	30	45	480
C	25	70	482
D	35	105	467
E	20	125	481

 

 

 

 

 

 

 

 

 

Thus the cut of price price is set at Rs 467

 

2. Weighted Average Method

Simply the weighted average of all the bids that have been received by the company is found out by finding value of each bid. This price is declared as the cut-off price.

 

Lets say for example Venkatesh is issuing 100 share at a price band of Rs 462 to 500

And there are say five investors who put forth their bids. So the cut of price will be decided as follows

 

 

Investor	No of Shares Bid	Bid Price	Shares Bid * Bid Price
A	15	500	7500
B	30	480	14400
C	25	470	11750
D	35	465	16275
E	20	462	9240
	125		59165

 

Thus the weighted avg cut off price is

 

= 59165 / 125

=Rs 473.32

 

Submission of prospectus to the ROC (Registrar of Companies)

Once the price discovery step is complete then the firm is obliged to draft the final prospectus of the IPO and submit with the Registrar of Companies and with the SEC and SEBI. They will in turn give the company a green signal to go forth with the issue.

 

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· Allotment of securities.

Then after filing with ROC the application amount received from the various bidders has to be adjusted and shares have to be allotted. For instance, if a bidder has bid a lower price than the cut-off price then a call letter has to be sent asking for the balance money to be paid. On the other hand, if a bidder has bid a higher price than the cut-off, a refund cheque needs to be processed for them. The settlement process ensures that only the cut-off amount is collected from the investors in lieu of the shares sold to them. Thus completing the process of book building for Venkatesh’s Company.

Answer to question 2

A Greenshoe option is also known as an over-allotment option. In the context of an initial public offering (IPO), it is a said provision in an underwriting agreement between the underwriter and the company which grants the underwriter the right to sell investors more shares than initially planned by the issuer (by transferring the ones held by promoters to investors), when the demand for a security issue proves higher than expected.

However there are some guidelines for issue of this green shoe option that any company has to abide by to ensure a legally sound implementation of green shoe.

· The laws require the promoter to lend his shares (not more than 15% of issue size) which is to be used for price stabilisation to be carried out by a stabilising agent (normally merchant banker or book runner) on behalf of the company. No extra shares are issued by the issuing company

· The stabilisation period can be up to 30 days from the date of allotment of shares to bring stability in post listing pricing of shares.

 

So Venkatesh can’t issue 500 shares under green shoe option if his main allotment was for 2000 shares. He can at max go forward with issue of 15 % of their initial issue ie 15% of 2000 i.e. 300 shares as green shoe option. And that too with the stabilising time period of 30 days post issue.