This article has been written by Ms. Komolika Srivastava, a final-year student of ILS Law College, Pune.

ABSTRACT

This concise overview navigates the complexities of the capital market, encompassing primary and secondary markets for new issuers and existing stocks. The primary market facilitates fresh capital through mechanisms like IPOs, complemented by the secondary market for continuous trading. It focuses on IPOs, highlighting Book Building’s dynamic role in price discovery and emphasizing its flexibility. The IPO grading process is explored, emphasizing committee analysis, SEBI’s role, and mandatory disclosure.

The spotlight then turns to SEBI’s recent guideline amendments, emphasizing transparency, extended lock-in periods for anchor investors, limitations on offer to sell, and enhanced fund utilization monitoring. Shareholder responsibilities are underscored, urging engagement through annual reports, auditor’s notes, and stock exchange updates. In conclusion, this abstract encapsulates the multifaceted dynamics of IPOs, Book Building, IPO grading, SEBI guidelines, and shareholder responsibilities, with a heightened focus on SEBI’s pivotal role.

INTRODUCTION

The capital market consists of the primary and secondary markets, where new issuers and existing stocks are traded, respectively. In the primary market, companies raise fresh capital through initial public offerings (IPOs), rights issues, or debt offerings. A well-functioning secondary market complements the primary market by offering investors a continuous platform for trading and liquidating their investments.

Companies seeking capital can utilize the primary market through IPOs, rights issues, or private placements. IPOs, in particular, involve the sale of securities to the public, providing companies with a vital means of accessing significant funds from the public capital market. Beyond financial benefits, an IPO enhances a company’s credibility and visibility, often serving as a primary source of financing for rapid growth and expansion. The prevalence of IPOs in the market is indicative of a robust economy and stock market.

During an IPO, direct interaction occurs between the company and investors, and the funds raised contribute to the company’s share capital. Through their participation in the IPO, shareholders acquire ownership rights in the company. This infusion of funds becomes a primary source for companies to create fixed assets crucial for their business operations. Shareholders also have the option to exit their investments through the secondary market. In summary, an IPO marks a significant milestone in a company’s growth, fostering financial development and providing a platform for investors to engage with the company’s ownership.

BOOK BUILDING

Book Building, as per SEBI guidelines, is a process integral to Initial Public Offerings (IPOs), involving the generation and accumulation of demand for securities to be issued by a corporate entity. The pricing of these securities is assessed to determine the quantity to be issued, with information communicated through notices, circulars, advertisements, documents, or information memoranda. Essentially, Book Building is a method employed in IPOs for efficient price discovery. Throughout the open period of the IPO, investors submit bids at various prices, either equal to or above the floor price and the final offer price is determined after the bid closing date.

The distinction between Book Building and Fixed Price Issues lies in how securities are offered. In Book Building, securities are presented at prices above or equal to floor prices, allowing for ongoing visibility into demand as the book is developed. Conversely, in a Fixed Price Issue, securities are offered at a predetermined fixed price, with overall demand revealed only at the close of the issue. With its dynamic pricing approach, Book Building offers flexibility and market-driven determination of the offer price, providing real-time insights into investor interest throughout the IPO process.

IPO GRADING PROCESS

1. Committee Analysis:

The IPO grading process begins with a thorough analysis presented to a committee comprising senior executives from the grading agency. This committee engages in comprehensive discussions on relevant issues, considering factors such as the company’s financial health, business prospects, and other pertinent considerations.

2. SEBI Review:

Following the internal analysis, the grading agency reviews observations from the Securities and Exchange Board of India (SEBI). Any necessary updates to the report are made based on the feedback received from SEBI. This iterative process ensures alignment with regulatory standards and enhances the accuracy of the grading.

3. Communication of Grade:

Once the analysis is complete, the assigned grade is communicated to the company. This communication includes a detailed assessment report outlining the rationale behind the assigned grade. This step is crucial for the company as it provides insights into the perceived strengths and weaknesses contributing to the overall grade.

4. Timeline Consideration:

Considering the intricate nature of the evaluation, the IPO grading process typically requires 2 to 3 weeks for completion. However, preliminary discussions with Credit Rating Agencies suggest that issuers should initiate the grading process approximately 6 to 8 weeks before the targeted IPO date. This extended timeline allows for thorough analysis and accommodates any unforeseen contingencies, ensuring a comprehensive and well-informed grading.

5. Disclosure and Reporting:

The assigned grade must be disclosed in the Red Herring Prospectus (RHP) and Prospectus. This disclosure is essential for potential investors as it provides an independent assessment of the IPO’s quality and reliability. Moreover, Credit Rating Agencies are mandated to forward the names and details of IPOs they have graded every month to SEBI and Stock Exchanges. This information is then made available on their respective websites, contributing to transparency and providing public access to details regarding IPO grading.

The IPO grading process is a meticulous and time-sensitive procedure that involves internal committee discussions, SEBI reviews, and transparent communication of grades to companies. Initiating this process well in advance of the targeted IPO date is recommended to account for any unforeseen circumstances. Additionally, the mandatory disclosure of the grade in the RHP and Prospectus enhances transparency for potential investors.

SEBI AND IPO GUIDELINES

SEBI, the regulatory body overseeing Indian commodity and capital markets, has recently amended guidelines for Initial Public Offerings (IPOs) in response to the surge in IPO activity during 2021. These changes aim to protect the interests of non-institutional and retail investors, and investors need to comprehend the altered IPO landscape in India.

1. Heightened Transparency Standards:

The updated SEBI guidelines underscore the need for transparency in operations for companies seeking inorganic growth through fundraising. Organizations are now mandated to articulate their goals clearly. If a company fails to define its objectives, the portion reserved for investments and acquisitions cannot exceed 25% of the total funds raised, with a cap of 35% on related expenditures. This ensures that investors can make well-informed decisions by gaining a clear understanding of a company’s objectives.

2. Extended Lock-In Duration for Anchor Investors:

Anchor investors, crucial in the initial allocation of stocks during IPOs, now face an extended lock-in period. They can sell only 50% of their investments after an initial 30-day lock-in, with the remaining 50% subject to a 90-day waiting period. This adjustment aims to prevent a rapid exit by anchor investors immediately after an IPO listing, promoting a more stable market for regular investors.

3. Limitations on Offer to Sell:

SEBI has introduced restrictions on the offer to sell to prevent IPOs from being used solely as an exit strategy for promoters and current shareholders. Shareholders with over 20% ownership cannot sell more than 50% of their shares, while those with less than 20% ownership are limited to selling a maximum of 10% of the total shareholding. This measure ensures that IPOs primarily raise capital for business operations rather than facilitating exits for existing investors.

4. Monitoring Fund Utilization:

In a move towards equity, SEBI will actively monitor and track the utilization of funds raised through an IPO. This scrutiny ensures that funds are used for the intended purpose for which the IPO was launched, providing investors with confidence that their investments contribute to the growth and development of the issuing companies.

For investors considering participation in upcoming IPOs, comprehending and aligning with these regulatory changes is crucial. Additionally, taking the prudent step of opening a Demat account enables investors to explore equities and ensure equitable distribution within their investment portfolios.

RESPONSIBILITIES OF SHAREHOLDERS

Shareholders bear a significant responsibility to remain well-informed about the affairs and performance of the companies in which they hold shares. One key source of information is the Annual Report, which is disseminated to shareholders via post or email. Additionally, these reports are made accessible on the company’s website and various stock exchanges. Shareholders are encouraged to carefully review the notices for shareholder meetings, as these documents outline the agenda for important discussions. In particular, the managing director’s note within the annual report provides valuable insights into the overall health and trajectory of the business, offering shareholders a deeper understanding of the company’s strategic direction.

The Auditor’s Note in the annual report is another crucial element that requires careful attention. Shareholders are advised to examine this section thoroughly to identify any red flags or adverse findings that may have been flagged by the auditors. This diligence ensures a comprehensive assessment of the financial health and integrity of the company.

Moreover, shareholders should actively seek out information available on the Stock Exchange Website. Here, corporate announcements, structural changes, press releases, and investor presentations are regularly updated. Monitoring these announcements provides shareholders with real-time updates on the company’s developments and strategic initiatives. This proactive approach is essential for making well-informed investment decisions.

Shareholders play a vital role in maintaining the integrity and transparency of the financial markets by staying engaged and informed. Regularly accessing and analyzing annual reports, auditor’s notes, and stock exchange announcements empowers shareholders to exercise their rights and contribute to the overall governance of the companies in which they invest.

CONCLUSION

In conclusion, the capital market encompasses primary and secondary markets, each serving a distinct purpose in the financial landscape. IPOs, a significant component of the primary market, offer companies a crucial avenue to raise capital and enhance visibility. A well-functioning secondary market complements this process, providing investors with liquidity options. Book Building, a key aspect of IPOs, is a dynamic process regulated by SEBI, facilitating efficient price discovery. It contrasts with Fixed Price Issues by allowing securities to be presented at varying prices during the IPO period, offering real-time insights into investor interest.

The IPO grading process is a meticulous journey involving committee analysis, SEBI review, and transparent communication of grades to companies. Issuers are advised to initiate this process well in advance of the IPO date, aligning with regulatory standards. SEBI’s recent IPO guideline amendments focus on heightened transparency, extended lock-in periods for anchor investors, limitations on offer to sell, and enhanced monitoring of fund utilization. Investors are encouraged to comprehend these changes for informed decision-making. Shareholders, key participants in the market, bear the responsibility of staying informed through annual reports, auditor’s notes, and stock exchange updates. Their active engagement contributes to market integrity and governance.

In essence, the dynamics of IPOs, Book Building, IPO grading, SEBI guidelines, and shareholder responsibilities collectively shape a vibrant and transparent financial ecosystem, fostering growth and informed investment decisions.

REFERENCES

• This article was originally written by NSE India (National Stock Exchange of India Ltd). The link for the same is herein  https://www.nseindia.com/products-services/about-initial-public-offerings
• This article was originally written by the Securities Exchange Board of India. The link for the same is herein  https://investor.sebi.gov.in/pdf/reference-material/ppt/PPT-3%20How%20to%20invest%20in%20Intial%20Public%20Offer%20Updated%2030%20Sep%202022.pdf

• This article was originally written by the Institute of Company Secretaries of India. The link for the same is herein https://www.icsi.edu/media/portals/25/IPO.pdf\
• This article was originally written by the Securities Exchange Board of India. The link for the same is herein https://www.sebi.gov.in/sebi_data/commondocs/subsection1_p.pdf
• This article was originally written by the Securities Exchange Board of India. The link for the same is herein https://www.sebi.gov.in/sebi_data/commondocs/mar-2020/Annexure%20PO_p.pdf
• This article was originally written by IIFL Securities. The link for the same is herein  https://www.indiainfoline.com/knowledge-center/ipo/ipo-process-in-india
• This article was originally written by M.Stock by Mirae Assets. The link for the same is herein   https://www.mstock.com/articles/ipo-process-in-india