STUDY OF INITIAL PUBLIC OFFERING

SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR

(MASTER IN FINANCIAL MANAGEMENT)

(Year 2009-2012)

PROJECT GUIDE

Prof.

SUBMITTED BY:

Name :

Roll No. :

Batch : (2009 - 2012)

IES Management College and Research Centre

University of Mumbai

DECLARATION

I hereby declare that this report submitted in partial fulfillment of the requirement of the award for the Master of Financial Management (MFM) to IES Management College is my original work and not submitted for award of any degree or diploma fellowship of for similar tiles or prizes.

I further certify that I have no objection and grant the rights to IES Management College to publish any chapter/ project if they deem fit in journals/Magazines and newspapers etc without my permission.

Place : Mumbai

Date : 15^th October 2011

Name :

Class :

Roll No. : 27 MFM III

CERTIFICATE

This is to certify that project titled: STUDY OF INITIAL PUBLIC OFFERING has been submitted by Mr. ………………….. towards partial fulfillment of the requirements of the Master in Financial Management (MFM) degree course 2009 - 2012 and has been carried out by him under the guidance of Prof. ……………………………………. at the IES Management College and Research Centre affiliated to the University of Mumbai.

The matter presented in this report has not been submitted for any other purpose in this Institute.

_______________________ __________________________

Guide : Director :

Place : Place :

Date : Date :

ACKNOWLEDGEMENT

On the completion of this project I would like to take this opportunity as a platform to thank all the people who helped me in this work and who made this project a success.

I express my heartfelt gratitude and thanks to Prof. DEVAKI NADKARNI for his guidance and support throughout this project. I am also thankful to him for giving his suggestions and encouragement throughout the project work and helping me continuously at each and every stage.

TABLE OF CONTENTS

Sr. No.	Particulars	Page No.
Chapter 1	Executive Summary
Chapter 2	Financial markets and IPO
Chapter 3	Primary Market
Chapter 4	IPO- Features
Chapter 5	Trends
Chapter 6	Pricing Of Issue
Chapter 7	Book Building
Chapter 8	Cost Of Issue
Chapter 9	Brief Note on Intermediaries
Chapter 10	SEBI and IPO
Chapter 11	Marketing of IPO
Chapter 12	Future Of The IPO Market
Chapter 13	Flow chart of the procedure of an IPO
Chapter 14	Case study – SKS Microfinance
Chapter 15	Bibliography

EXECUTIVE SUMMARY

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. The securities which the companies issue for the first time to the public and other financial institutions either after incorporation or on conversion from private to public company is called “INITIAL PUBLIC OFFERING” or “IPO”. Raising equity gives boost to economical development of the country.

Raising money through IPO is a very complex process. It requires analysis and implementation of various commercial laws applicable to IPO-Prospectus. These laws are Companies Act, Income Tax Act, FEMA, Securities Contract Act and SEBI Guidelines on “Disclosure and Investor Protection”. It is also necessary to implement circulars from time to time by SEBI. The introduction of SEBI attracted Foreign Institutional Investors to invest money in stock market in India. It has also helped Indian Companies to offer securities in most scientific method to Indian and Foreign investors

Therefore to understand this complex subject, I decided to undertake studies by this Project Report.

The basic objective of my study on IPO is mainly as under-

Ø To analyze and evaluate the complex IPO process

Ø To study and incorporate the legal requirements of an IPO

Ø SEBI Norms and Guidelines

Ø Various aspects of IPO like cost, Involvement of intermediaries, pricing of an IPO.

Ø Pricing of an issue through the Book-Building Method

Ø We have included the prospectus of the latest IPO- SKS Microfinance Ltd in a compact form. We have given prospectus to explain applicability of various laws and guidelines.

The limitations with this report are as under-

Ø We have excluded guidelines and procedures relating to ADR/GDR to raise money by issuing securities abroad.

Ø We have also excluded procedures relating to listing securities in Foreign Stock Exchange

Ø We have excluded provision relating to the stock invest option in the IPO-Application form.

Ø We the company is making IPO just to get securities listed on Stock Exchange and make disinvestment promoters, then the money will not come to company and pricing method followed will also be different.

Ø We have not covered how the IPO process is carried out in international markets.

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.

Modern day Stock Exchanges are most of the centers to trade in the existing financial assets. In this respect, they have come a long way in the sense that these days, they act as a platform to launch new securities as well as act as most authentic and real time indicator of the general economic sentiment.

The zone of activities in the capital market is dependent partly on the savings and investment in the economy and partly on the performance of the industry and economy in general. In other words capital market constitutes the channel through which the capital resources generated in the society and made available for economic development of the nation.

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

Ø The Primary Market

Ø 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

PRIMARY MARKET-GENESIS AND GROWTH

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 Market.

What is an IPO?

The securities which the companies issue for the first time to the public either after incorporation or on conversion from private to public company is called “INITIAL PUBLIC OFFERING” or “IPO”

GROWTH OF IPO’s IN INDIA

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.

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.

POPULARISING THE NEW ISSUE.

Late Shri, Dhirubhai Ambani can be considered as ‘Bhishmapita’ of new issues, though initially he also had to struggle to get subscribers but he always used innovative ides for marketing IPOs. It is said that investor never lost money in his pricing methods. There are several incidences of the common man participated in his issues, got allotment, sold shares and created fabulous wealth for themselves. As on 31-12-2003, Reliance Group has more than 3.5 million shareholders.

INITIAL PUBLIC OFFERING

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

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

Ø To finance increased working capital requirement

Ø As an exit route for existing investors

Ø For debt financing.

ADVANTAGES OF GOING PUBLIC

· Stockholder Diversification As a company grows and becomes more valuable, its founders often have most of its wealth tied up in the company. By selling some of their stock in a public offering, the founders can diversify their holdings and thereby reduce somewhat the risk of their personal portfolios.

· Easier to raise new capital

If a privately held company wants to raise capital a sale of a new stock, it must either go to its existing shareholders or shop around for other investors. This can often be a difficult and sometimes impossible process. By going public it becomes easier to find new investors for the business.

· Enhances liquidity

The sock of a closely held firm is not liquid. If one of the holders wants to sell some of his shares, it is hard to find potential buyers-especially if the sum involved is large. Even if a buyer is located there is no establishes price at which to complete the transaction. These problems are easily overcome in a publicly owned company

· Establishes value for the firm

This can be very useful in attracting key employees with stock options because the underlying stock have a market value and a market for them to be traded that allows for liquidity for them.

· Image

The reputation and visibility of the company increases. It helps to increase company and personal prestige.

· Other advantages

Additional incentive for employees in the form of the companies stocks. This also helps to attract potential employees

It commands better valuation of the company

Better situated for making acquisitions

DISADVANTAGES OF GOING PUBLIC

Ø Cost of Reporting

A publicly owned company must file quarterly reports with the Securities and exchange Board of India. These reports can be costly especially for small firms.

Ø Disclosure

Management may not like the idea or reporting operating data, because such data will then be available to competitors.

Ø Self dealings

The owner’s managers of closely held companies have many opportunities for self-transactions, although legal they may not want to disclose to the public.

Ø Inactive market low price

If a firm is very small and its and its shares are not traded frequently, then its stock will not really be liquid and the market price may not be truly representative of the stocks value.

Ø Control

Owning less than 50% of the shares could lead to a loss of control in the management.

Ø Other disadvantages

The profit earned by the company should be shared with its investors in the form of dividend

An IPO is a costly affair. Around 15-20% of the amount realized is spent on raising the same.

A substantial amount of time and effort has to be invested.

TRENDS IN IPO

PRIMARY REASONS FOR A COMPANY GOING PUBLIC.

Most people label a public offering as a marketing event, which it typically is. For the majority of firms going public, they need additional capital to execute long-range business models, increase brand name, to finance possible acquisitions or to take up new projects. By converting to corporate status, a company can always dip back into the market and offer additional shares through a rights issue.

PERFORMANCE IN 90s

Let us have a look at the general development of the Primary Markets in the nineties. There have been many regulatory changes in the regulation of primary market in order to save investors from fraudulent companies. The most path breaking development in the primary market regulation has been the abolition of CCI (Controller of capital issues). The aim was to give the freedom to the companies to decide on the pricing of the issue and this was supposed to bring about a self-managing culture in the financial system. But the move was hopelessly misused in the years of 1994-1995 and many companies came up with issues at sky-high prices and the investors lost heavily. That phase took a heavy toll on the investor’s sentiment and the result was the amount of money raised through IPO route.

1993-96: SUNRISE, SUNSET.

With controls over pricing gone, companies rushed to tap the Primary Market and they did so, with remarkable ease thanks to overly optimistic merchant bankers and gullible investors. Around Rs20000 crores were raised through 4053 issues during this period. Some of the prominent money mobilizes were the so called ‘sunrise sectors’-polyester, textiles, finance, aquaculture. The euphoria spilled over to the Secondary Market. But reality soon set in. Issuers soon failed to meet projections, many disappeared or sank. Result: the small investor deserted both markets-till the next boom!

1998-2000: ICE ON A HOT STREAK

As the great Indian software story played itself out, software stocks led a bull charge on the bourses. The Primary Market caught up, and issues from the software markets flooded the market. With big IPOs from companies in the ICE (Information Technology, Communication and Entertainment) sectors, the average issue price shot up from Rs.5 crore in 1994-96 to Rs.30 crore. But gradually, hype took over and valuations reached absurd levels. Both markets tanked.

2001-2002-ALMOST CLOSED

There were hardly any IPOs and those who ventured, got a lukewarm response. A depressed Secondary Market had ensured that the doors for the Primary Market remained closed for the entire FY 2001-2002.There were hardly any IPOs in FY 2001-2002.

2002: QUALITY ON OFFER.

The Primary Market boom promises to be different. To start with, the cream of corporate India is queuing up, which ensures quality. In this fragile market, issue pricing remains to be conservative, which could potentially mean listing gains. This could rekindle the interest of small investors in stocks and draw them back into the capital market. The taste of gains from the primary issues is expected to have a spillover effect on the secondary market, where valuations today are very attractive.

2003: IPO-IMPROVED PERFORMANCE OVERALL!

Even as the secondary market moved into top gear in 2003 the primary market too scripted its own revival story, buoyed largely by the Maruti IPO which was oversubscribed six and a half times. In 2003 almost all primary issues did well on domestic bourses after listing, prompting retail investors to flock to IPO’s. All IPO’s, including Indraprastha Gas and TV Today Network which was oversubscribed 51 times showed the growing appetite for primary issues.

Divi Labs hit the market in February followed by Maruti. Initially, the Maruti share price was considered steep at Rs125 per share for a Rs5 paid-up share. By the end of the year, the stock had climbed to over Rs355. Close on the heels of Maruti, came the Uco Bank IPO, which attracted about 1mn applicants. The primary issue of Indian Overseas Bank attracted about 4.5mn applicants and Vijaya Bank over Rs40bn in subscriptions. The last one to get a huge response was Indraprastha Gas, which reportedly garnered about Rs30bn. TV Today’s public offer was expected to draw in excess of Rs30bn. In overseas listings, the only notable IPOs were Infosys Technology's secondary ADR offering and the dull debut of Sterlite Group company Vedanta on the London Stock Exchange.

It was really Maruti Udyog that took the lead with its new issue in June. The issue was heavily over-subscribed and by the middle of December the share value appreciated 186 per cent. The near trebling of the investment in less than 6 months inspired the retail investor who is now back again in the market scouting for good scrips.

After the phenomenal success of Maruti issue, a number of companies have approached the capital market and a lot more are waiting for SEBI approval.

SEBI has taken enough care to force companies to make relevant disclosures for the investor to judge the quality of new issues. Besides, the companies themselves have been careful not to over-price the shares. On the contrary, some of the companies have deliberately under-priced them to let the issue get over-subscribed and to let the investor share some of the capital gain after listing. With the care taken by SEBI and the companies it is unlikely that the experience of 1995 will be repeated.

In the financial year just ended, 23 companies tapped the primary market and managed to garner less than Rs200bn.

The latest development in the primary market has been the Indian players thirst for money satiating offshore

INITIAL PUBLIC OUTBURST

Riding high on the market bull, companies are preparing to lap up investor’s money through Initial Public Offerings (IPO’s). The fundamentally good economy makes us very positive about the initial public offering market. Nearly 600 companies wish to raise over Rs50,000 Crore, for a variety of reasons—public sector units for capital (Power Finance Corporation and National Thermal Power Corporation), residual sale (CMC and IBP), divestment (ONGC and Gas Authority of India Ltd), banks for capital (Central Bank of India and Punjab & Sind Bank), for market valuations (Tata Consultancy Services), for venture capital exit (UTV and Secure Meters), and for expansion (Biocon and NDTV).

Among these Biocon the first Indian Biotech company to come with an IPO was oversubscribed by 33% and raised as much as Rs.315 Crore. Other mega issues included TCS which was oversubscribed 5.46 times and raised Rs.417 Crore. The much awaited government companies ONGC was oversubscribed by 6 times and raised a whooping capital of Rs.1069.49 Crore another government company which was a huge success was IPCL which too was oversubscribed by 1.18 times raising a capital of Rs.1010.45 Crore. The media company NDTV was oversubscribed 3 times its size.

Other IPO’s to hit the market this year were Shah Petroleum (31.78 Crore) Crew Bos Products (12.25 Crore) Texmaco (15.49 Crore) Vishal Export Overseas (27 Crore).

A slew of IPO’s have been lined up in the coming months from the public as well as the private sector. The IPO’s are estimated to raise Rs25,000-30,000 Crore. The sentiment for IPO’s has been bolstered after the government came out with fair pricing of its stake sale in IPCL.

Among the companies slated to come out with IPO’s include: Reliance Infratel Ltd., Bharat Oman Refineres Ltd., REIT’s Ltd.

RECENT IPOS

Issuer Company	Issue Date	Closing Date	Offer Price	Issue Size In Crore Rs.
Indo Thai Securities Limited IPO	30-Sep-11	5-Oct-11	74/-	29.6
Flexituff International Ltd IPO	29-Sep-11	5-Oct-11	155/-	104.63
Taksheel Solutions Ltd IPO	29-Sep-11	4-Oct-11	150/-	71.50 - 82.50
Onelife Capital Advisors Ltd IPO	28-Sep-11	4-Oct-11	110/-	36.85
M and B Switchgears Ltd IPO	28-Sep-11	5-Oct-11	186/-	90.00 - 93.00
Tijaria Polypipes Ltd IPO	27-Sep-11	29-Sep-11	60/-	60
Swajas Air Charters Ltd IPO	26-Sep-11	5-Oct-11	90/-	37.5
RDB Rasayans Ltd IPO	21-Sep-11	23-Sep-11	79/-	35.55
Prakash Constrowell Ltd IPO	19-Sep-11	21-Sep-11	138/-	60
PG Electroplast Limited IPO	7-Sep-11	12-Sep-11	210/-	120.65
TD Power Systems Ltd IPO	24-Aug-11	26-Aug-11	261/-	227
SRS Limited IPO	23-Aug-11	26-Aug-11	65/-	203
Brooks Laboratories Ltd IPO	16-Aug-11	18-Aug-11	100/-	63
Tree House Education & Accessories Ltd IPO	10-Aug-11	12-Aug-11	153/-	113.83
L&T Finance Holdings Limited IPO	27-Jul-11	29-Jul-11	59/-	1,245.00
Inventure Growth & Securities Ltd IPO	20-Jul-11	22-Jul-11	117/-	81.9
Bharatiya Global Infomedia Ltd IPO	11-Jul-11	14-Jul-11	82/-	55.1
Readymade Steel India Ltd IPO	27-Jun-11	29-Jun-11	108/-	34.75
Rushil Decor Ltd IPO	20-Jun-11	23-Jun-11	72/-	40.64
Birla Pacific Medspa Ltd IPO	20-Jun-11	23-Jun-11	11/-	65.18

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.

Ø 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.

During the booming period stock market issues got oversubscribed beyond imagination. Number of companies came in with stiff premium and faced investor resistance. This resulted in cautious approach by the merchant bankers and underwriters for taking up underwriting of the future issues.

Ø 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. The lead manager has to ensure full subscription of the full quota. Then the price is declared in the newspapers. The retail investor has to follow this price and submit application with cheque or demand draft. This part of the issue should also be fully subscribed. If the issue is not underwritten and subscription received is less than 90% then the IPO is considered as fail and whatever fund has been received has to refund. The company looses money it has spent on IPO.

Thus pricing is most important and difficult aspects of IPO. However in the present scenario the book building method prices most of the issues. Accurate pricing is essential for the success of IPO.

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.

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, IPO’s are usually marketed at a fixed price. Here the merchant banker cannot anticipate the demand 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

Features	Fixed Price Process	Book Building Process
Pricing	Price at which the Security is offered/allotted is known in advance to the investor.	Price at which the Security will be offered/allotted is not known in advance to the investor. Only an indicative price range is known.
Demand	Demand for the securities offered is known only after the closure of the issue.	Demand for the securities offered can be known everyday as the book is built.
Payment	Payment if made at the times of subscription wherein refund is given after allocation	Payment only after allocation.

Guidelines for Issues to be made through 100% Book Building Route

SEBI had issued guidelines in October 1997 for book building which were applicable for 100% of the issue size and for issues above Rs.100 Crore. The guidelines were revised subsequently to reduce the limit to issues of Rs.25 crore to encourage the use of this facility. However, no issuer used this facility. SEBI modified the framework for Book

Building further in October 1999 to make it more attractive. The modified framework does not replace the existing guidelines. The issuer would have option to issue securities using book-building facility under the existing framework:

The present requirement of graphical display of demand at bidding terminals to syndicate members as well as the investors has been made optional.
The 15% reservation for individual investors bidding for up to 10 marketable lots may be merged with the 10% fixed price offer.
Allotment for the book built portions shall be made in demat form only.
The issuer may be allowed to disclose either the issue size or the number of securities to be offered to the public.
Additional disclosure with respect to the scheme for making up the deficit in the sources of financing and the pattern of deployment of excess funds shall be made in the offer document.

Is the process followed in India different from abroad?

Unlike international markets, India has a large number of retail investors who actively participate in IPO’s. Internationally, the most active investors are the Mutual Funds and Other Institutional Investors. So the entire issue is book built. But in India, 25 per cent of the issue has to be offered to the general public. Here there are two options to the company. According to the first option, 25 per cent of the issue has to be sold at a fixed price and 75 per cent is through Book Building. The other option is to split the 25 per cent on offer to the public (small investors) into a fixed price portion of 10 per cent and a reservation in the book built portion amounting to 15 per cent of the issue size. The rest of the book built portion is open to any investor.

COST OF PUBLIC ISSUE.

The cost of public issue is normally between 8 and 12 percent depending on the size of the issue and on the level of marketing efforts. The important expenses incurred for a public issue are as follows:

· Underwriting expenses: The underwriting commission is fixed at 2.5 % of the nominal value (including premium, if any) of the equity capital being issued to public.

· Brokerage: Brokerage applicable to all types of public issues of industrial securities are fixed at 1.5% whether the issue is underwritten or not. The managing brokers (if any) can be paid a maximum remuneration of 0.5% of the nominal value of the capital being issued to public.

· Fees to the Managers to the Issues: The aggregate amount payable as fees to the managers to the issue was previously subject to certain limits. Presently, however, there is no restriction on the fee payable to the managers of the issue.

· Fees for Registrars to the Issue: The compensation to he registrars, typically based on a piece rate system, depends on the number of applications received, number of allotters, and the number of unsuccessful applicants.

· Printing Expenses: These relate to the printing of the prospectus, application forms, broachers, share certificate, allotment/refund letters, envelopes, etc.

· Postage Expenses: These pertain to the mailing of application forms, brochures, and prospectus to investors by ordinary post and the mailing of the allotment/refund letters and share certificates by register posts.

· Advertising and Publicity Expenses: These are incurred primarily towards statutory announcements, other advertisements, press conferences, and investor’s conferences.

· Listing Fees: This is the concerned fee payable to concerned stock exchange where the securities are listed. It consists of two components: initial listing fees and annual listing fees.

· Stamp Duty: This is the duty payable on share certificates issued by the company. As this is the state subject, it tends to vary from state to state.

BRIEF NOTE ON INTERMEDIARIES

The process of IPO is highly complex and its success is extremely important for the company. In this process it is important that all the intermediaries should work cohesively and within a framework of law. Any serious error by any intermediary can affect the IPO.

The following are the important intermediaries involved in the process-

Ø MERCHANT BANKERS ( Suppliers of IPO )

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.

Functions-Merchant banker can work as lead manager co lead manager investment banker underwriter etc.

Responsibility-lead managers are fully responsible for the content and correctness of the prospectus. They must ensure the commencement to the completion of the IPO. Certain guidelines are laid down in section 30 of the SEBI act 1992 on the maximum limits of the intermediaries associated with the issue.

Size of the Issue	No of Lead Managers
50 cr.	2
50-100 cr.	3
100-200 cr.	4
200-400 cr.	5
Above 400 cr.	1 or more as agreed by the board

The number of co managers should not exceed the number of lead managers. There can be only 1 adviser to the issue. There is no limit on the number of underwriters.

Informational Asymmetry-in general merchant bankers know the market better than the issuing company. They would exploit the superior knowledge to under price issues. This makes their job easier and helps them earn the goodwill of investors.

Ø BROKERS (Rivals & the LKP Securities Ltd. )

All the recognized stock exchange members are called brokers and thus any member of a recognized stock exchange can become a broker to the issue.

The brokers can work as broker and underwriter or both. In India usually a broker not only does his normal broking business buying and selling securities for brokerage but also works as an underwriter. They can give underwriting commitment in accordance with their net worth. 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.

Ø 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.

Finding investors-the underwriter first puts together a syndicate of other underwriters to distribute the shares. The syndicate finds investors willing to put their money into the company. This has serious implications. Will the investors be institutional or private? Is the company widely held or are the shares concentrated with just a few investors?

Experience-the underwriter knows the detail of the process better than any other participant since issuing shares is one of their primary business functions. Underwriters are the ones who provide proper guidance.

After market support-the underwriter protects investors and thus makes the offering more attractive. It is important for the firm to have a clear understanding with the underwriter exactly how much support he plans to provide if the IPO is not fully subscribed and accordingly his underwriting commission is fixed.

Future services-a good relationship with an underwriter can save time and money in future dealings.

Pre offering assistance-the underwriter will conduct road shows with the company’s management distribute the prospectus and marketing of the underwriters directly generates talk to potential investors about appropriate pricing. Some part of the value that the potential shareholders attach to shares.

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.

Nature of Issue	On amount Devolving on Underwriters	On amounts subscribed by the public
Equity shares preference shares and Debentures	2.5%	2.5%
Issue amount upto Rs5 lakhs	2.5%	2.5%
Issue amount exceeding %	2.0%	1.0%

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

Ø BANKERS TO THE ISSUE

Any scheduled bank registered with SEBI can be appointed as the banker to the issue. Several commercial banks are working as bankers 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 money (cheque/drafts) maintains a daily report, transferring the proceeds to the share application money collected with the application forms to the registrar. The bank provides application forms to the investors. They accept duly filled forms with cheque/ drafts. They prepare collection reports and transfer funds and applications to the company/registrar.

Ø 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.

Ø DEPOSITORIES

Since the year 2000 it’s 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.

Ø 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.

SEBI AND IPO

ELIGIBILITY NORMS

FOR UNLISTED COMPANIES

Ø 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.

Ø 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.

Ø 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

Ø 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.

Ø 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.

Ø Risk Factor-The Company/Merchant Banker must specify the major risk factor in the front page of the offer document.

Ø General Risk-Attention of the investor must be drawn on these risk factors.

Ø 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.

Ø Listing Arrangement- It must clearly state that once the issue is subscribed where the shares will be listed for trading.

Ø 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.

Ø 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.

Ø 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.

Ø 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.

Ø 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.

Ø 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.

Ø 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.

Ø 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.

Ø Dematerialisation of Shares-As per the provisions of the Depositories Act, 1996, And SEBI Rules, now all IPO will be in Demat form only.

Ø 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.

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

2. If the paid up capital is less than 3 crores then they can be listed on the Over The Counter Exchange of India (OTCEI)

3. 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

1. Offer to the public is not less than 10% of the securities issued.

2. A minimum number of 20 lakh securities is offered to the public

3. Size of the net offer to the public is not less than Rs.30 crores.

Promoters Contribution

1. Promoters should bring in their contribution including premium fully before the issue

2. Minimum promoter’s contribution is 20-25% of the public issue.

3. Minimum lock in period for promoter’s contribution is five years.

4. Minimum lock in period for firm allotment is three years.

Collection Centers for Receiving Applications

1. There should be at least 30 mandatory collection centers, which should include invariably the places where stock exchanges have been established.

2. For issues not exceeding Rs.10 crores the collection centers shall be situated at:-

· The 4 metropolitan centres viz. Mumbai, Delhi, Calcutta, and Chennai.

· All such centres where stock exchange are located in the region in which the registered office of the company is situated.

Regarding allotments of shares

1. Net Offer the general public has to be atleast 25% of the total issue size for listing on a stock exchange

2. 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.

3. In an issue of more than 25 crores the issuer is allowed to place the whole issue by book-building.

4. Minimum of 50% of the Net Offer to the public has to be reserved for the investors applying for less than 1000 shares.

5. There should be atleast 5 investors for every 1 lakh equity offered.

6. 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.

7. Indian development financial institutions and Mutual Fund can be allotted securities upto 75% of the issue amount.

8. 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.

9. 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

1. 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.

2. 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.

3. 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

4. Allotment has to be made within 30 days of the closure of the Public issue and 42 days in case of Rights issue

5. 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.

1. Refund orders have to be dispatched within 30 days of the closure of the issue.

2. 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

1. 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.

2. If the issue is undersubscribed then the collected amount should be returned back

3. 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.

4. There should not be any outstanding warrants for financial instruments of any other nature, at the time of the IPO.

5. 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.

6. Code of advertisement as specified by SEBI should be adhered to

7. Draft prospectus submitted to SEBI should also be submitted simultaneously to all stock exchanges where it is proposed to be listed.

Restrictions on Allotments

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

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

3. 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:

Ø 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.

Ø 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.

Ø Permission to freely price the offerings in the domestic market provided the promoter companies along with equipment supplier sand other strategic investors subscribe to 50 percent of the equity at the same price as the price offered to the public or at a price higher than that offered to the public.

Ø Permission to keep the issues open for 21 days to enable the companies to mobilize funds.

Ø 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

These concessions are available to them if these are appraised by a Development Financial Institution, Infrastructure Development Finance Corporation or Infrastructure Leasing and Financing Services Ltd. and there is a minimum financial participation by them. The minimum participation of the appraising agency, initially fixed at 10% of project cost, was reduced to 5%. Further, the minimum participation can be met by any of the appraising agencies, jointly or severally, irrespective of whether they appraise the project or not.

Eligibility norms for public issues/offers for sale by companies in the IT Sector

Ø Eligibility norms were modified to provide that a company in the IT Sector going for IPO/offer for sale shall have track record of distributable profits as per Section 205 of the Companies Act in three out of five years in the IT business/from out of IT activities.

Ø It can also access the market through the alternative route of appraisal and financing by a bank or financial institution.

Ø The same conditions would apply also to a listed company which has changed its name to reflect activities in IT sector.

MARKETING OF IPO

The role of marketing, and particularly promotion, in the pricing and trading of Securities is fairly limited

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 IPO’s. If these factors are favorable then the Company must find out about the timing of other prestigious IPO’s. Normally in good times many companies are crowding at the same time .This year more than 29 companies are coming with IPO’s. Around Rs.25,000-30,000crore of capital is going to be raised this year.

A question of Timing

Timing the issue is critical as it determines the success or failure of an issue to a great extent.

During 1995-96, Primary Market boom, there was a period during which there were two to three issues in a day. This is a dangerous situation.

The ideal time for marketing an issue is a boom in the Secondary Market, peaceful socio-political-economic environment and at least two days gap between two issues.

Marketing initial public offers (IPO’s) through the secondary market

SEBI approved a proposal of marketing IPO’s through the secondary market. It proposes to use the existing infrastructure of stock exchanges (terminals, brokers and systems), presently being used for secondary market transactions, for marketing IPO’s with a view to get rid of certain inherent disadvantages faced by issuers and investors like tremendous load on banking and postal system and huge costs in terms of money and time associated with the issue process. This system would confirm to all extant statutory requirements.

Ø The investor would approach broker for placing an order for buying shares of primary issues.

Ø The registrar in consultation with merchant banker and the regional stock exchange of the issuer will finalize the basis of allotment and intimate the same to the exchanges who in turn shall inform the brokers.

Ø The brokers will advise the successful allottees to submit the application form and the amount payable towards the shares.

Ø The broker will deposit the amount received in a separate escrow account for the primary market issue.

Ø The clearing house of the exchange will debit the primary issue account of the broker and credit the issuer’s account.

Ø Subsequently, the certificates would be delivered to the investors or the depository account of the investor would be credited.

Ø The securities can be listed on the stock exchange from the 15th day from the closure of the issue as against 45-60days at present.

Ø As investors will have to part with their funds only on successful allotment, their funds are not unnecessarily blocked. This would also ensure that refunds are done away with. The system seeks to reduce the time taken presently for completion of the issue process, as well as the cost of the issue.

The Effects of Marketing on IPO’s

An investment banker’s marketing campaign for an IPO is critical. This campaign, as much as anything that precedes or follows it, will determine the success or failure of the IPO. The key is to stimulate investor demand for the stock so that, the demand will exceed the supply. Through the marketing effort, the underwriter attempts to create an imbalance in the supply/demand equation for the issue, so that there are more buyers than sellers when the stock is finally released for sale to the public.

Before a company gets to market through an IPO, it spends a fortune on hype, Paperwork and publicity to create demand. The buzz is stirred up before the shares are released. So you never get in cheap. And the ones that are cheap are usually not worth holding five minutes.

To understand the sense of these statements one must understand the relationship between the marketing of an IPO and its initial returns, and how different parties benefit from this relationship. A security’s value is an increasing function of the number of investors who know about the security. Investor knowledge leads to greater value consequently; the efforts taken by an investment banker to promote awareness in a firm can affect the valuation of its stock by expanding the investor base.

The reputation of an investment banker could expand a firm’s investor base at a lower cost than the firm can, since the promotional efforts of an investment banker on behalf of the firm would be more creditable. The efforts of an investment banker to promote an IPO through increased media coverage will increase retail interest in that stock.

The effects of an investment banker’s promotional efforts are not only important for explaining the initial returns of some IPO’s, but also for explaining the rankings of investment bankers Promoting an issue sufficiently to insure a run-up in its early aftermarket prices attracts further investor interest catches the interest of analysts and helps to maintain or expand the investor base of the stock.

If the sole motivation of a road show were to sell IPO’s to their regular institutional investors and if those investors were to hold onto these stocks, then there would be no motivation for an investment banker to do more than a minimal amount of promotion since there would be no need to attract retail investors in early aftermarket trading. However, research contradict that these institutional investors do not hold onto the shares allocated to them over the long-term, instead they sell their allocation, primarily to retail customers in “hot” issues

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 investor’s decision for investment.

PRINTING STATIONERY-PROSPECTUS

The company has to print approved prospectus and provide enough copies to all intermediaries. If any investor asks for a copy of prospectus it must be provided to him without any fees. Sufficient quantities should be maintained at the registered office of the company and with the Lead Managers.

PRINTING APPLICATION FORMS

Sufficient number of application forms must be printed much before the opening of the issue. Each form must contain abridged prospectus in SEBI approved format. Sometimes different coloured forms are issued to FI, FII, NRI and general public. It is compulsory to provide stationery to all underwriters and brokers. They will arrange distribution to their sub-brokers and other clients. Sometimes, company makes direct dispatch of forms to prospective investors.

IPO Dashboard

Basis of Allotment (or Basis of IPO Stock Allocation) is a document published by the registrar of an IPO after finalizing the share allocation based on SEBI guidelines. This document provides information about the demand of the IPO stock.

The IPO allotment information is categorized by number of shares applied by investors. For each such category detail bidding information is provided in this document including number of valid application received, total number of share applied, ratio of the allotment and number of shares allocated to the applicants.

Ratio of the allotment is a critical factor for IPO's oversubscribed multiple times. This field tells how many applicants will receive single lot of shares among a certain number of applicants. For example, ratio 1:8 means only one out of eight applicant received one lot of shares; ratio value 'FIRM' means all the applicants are eligible to receive certain amount of share.

ANCHOR INVESOTRS IN IPO

In a move that would boost confidence of investors in the IPO market, market regulator Securities & Exchange Board of India (Sebi) has allowed anchor investors (qualified institutional investors) in initial public floats of companies with a lock-in of 30 days from the day of listing. The Sebi has also made it mandatory for unlisted companies tapping the capital market to get listed in at east one exchange having nationwide terminals.

Market experts say both these steps would help in raising the confidence and quality of the primary market in India. Normally, whenever a company comes out with an initial public offer, its success or failure depends on the response it gets from the qualified institutional buyers. Retail investors largely apply for an IPO only on the closing date, after seeing the response of institutional investors.

Reacting to the development, Deven Choksey, MD, KR Choksey Securities, said: “The anchor investors would provide a safety net for IPOs in adverse market conditions. With anchor investors stepping in, retail investors would feel more secure and comfortable in subscribing to any public issue."

The anchor investors are supposed to bring in 25% upfront money before the issue and the remaining 75% within two days of allotment. Moreover, no person related to the promoter or promoter group and book running lead managers can apply as anchor investors to ensure more certainty to transactions.

"By not allowing promoters or promoter-related groups to apply as an anchor investors, Sebi has ensured that round tripping of promoters' money would not happen. This would also ensure that the anchor investors are knowledgeable and genuine, which would give a positive signal to other investors," said, Amitabh Chakraborty, president (equity), Religare Securities.

Making it mandatory for unlisted companies to get listed in a stock exchange having nationwide presence would weed away poor quality IPOs and ensure that only genuine companies tap the market, felt Choksey.

FUTURE OF THE IPO MARKET

The Indian initial public offer (IPO) market has always had more than its fair share of doomsayers Right from the Maruti issue, which pundits decried as being overpriced, to the ONGC and TCS issues, where the huge sizes of the offerings drew predictions of calamitous effects on the secondary markets, the opinions of the “experts” have proved to be wide off the mark.

Not only did the mega issues sail through, but the secondary markets proved to be far more resilient than anybody had anticipated. The data show that as much as Rs. 23,904 Crore has been raised from the primary market in the current calendar year, making it obvious that the Indian investor has far more appetite for equities than most people realise.

Most of the money has been raised by big companies with a long-term track record. A substantial number of issues—barring that of TCS—also happened during the early part of the year, before the markets got the shivers. The heavy oversubscriptions in many cases can also be traced to the availability of bank finance for IPO investment.

Nevertheless, there is no denying the enormous interest retail and other investors have shown in the primary market, perhaps even more so than in the secondary one.

This interest has been sustained despite the lack of bounce in the secondary market and is not confined to the big issues; even smaller issues have sailed through with large oversubscriptions.

If investors are gung-ho about IPO’s, there are several reasons for it.

Unlike earlier IPO booms, this one is being driven by a much better quality of offering. Missing in action so far are the fly-by-night operators of the 1990s who made public offers only to collect the money and vanish.

Next, most recent IPO’s have resulted in gains on listing for the investor. The listing gains have probably initiated a kind of virtuous cycle, tempting investors who have already made money to return to the primary market.

There is also reason to believe that companies are pricing their issues less aggressively this time, either due to general concerns about a volatile market, or because of a deliberate effort to leave something on the table for all investors.

Companies have been quick to take advantage of the investor interest in IPO’s, and banks, broking houses, retail outfits, media houses and government companies such as NTPC and Power Finance Corporation are lining up issues

Even mutual funds have got into the act, and are tailoring their offerings to match current market fancies—mid-cap funds, dividend yield funds, and what-have-you. If the government wants to get some money into its kitty through disinvestment programmes, this is the time to make a dash for it.

IPO SCAM

YES Bank Ltd shares were listed on the BSE and the NSE on July 12, 2005. The modus operandi adopted in manipulating the YES Bank Ltd (YBL)’s initial public offering (IPO) allotment involved opening of over 7,500 benami dematerialised accounts.

These accounts were with the National Securities Depository Ltd (NSDL) through Karvy Stockbroking Ltd (Karvy-DP). Of the 13 erring entities, the chief culprits identified by SEBI were Ms Roopalben Panchal and Sugandh Estates and Investments Pvt Ltd.

While Ms Panchal opened 6,315 benami DP accounts, another entity Sugandh opened 1,315 benami accounts. Each of these accounts applications were made for 1,050 shares, paying application money of Rs 47,250 each. By applying for small lots (1,050 shares through each accounts), they misused the retail allotment quota stipulated for IPOs. The shares allotted in IPO to the benamis of Ms Panchal and Sugandh would have otherwise gone to genuine retail applicants.

The IPO of YBL opened on June 15, 2005 and It was observed that Ms Panchal had transferred 9,31,600 shares to various entities in seven off-market transactions on July 11 – a day prior to the listing and commencement of trading on the stock exchanges. In order to get an allotment of 9,31,600 shares, Ms Panchal would have had to apply for crores of shares involving many crores of rupees in application money.

However, Ms Panchal’s name did not appear in the list of top 100 public issue allottees. Thus, it was suspected that Ms Panchal must have made multiple applications or that other applicants were acting as a front for her.

Ms Panchal had applied for only 1,050 shares in the YES Bank IPO, paying the application money of Rs 47,250. And she did not receive any allotment in the IPO. On July 6, Ms Panchal received 150 shares each from 6,315 allottees through off-market transactions aggregating 9,47,250 YBL shares.

Curiously, as per the dematerialized account data furnished by NSDL, of the above 6,315 entities as many as 6,221 entities have a same address in Ahmedabad. There are three more addresses of locations in Ahmedabad, which have been linked to Ms Panchal. All the 6,315 entities have their bank accounts with Bharat Overseas Bank and demat accounts with Karvy-DP.

By applying for the maximum possible number of shares per applicant while being categorised as retail applicant and by putting in large number of applications in the lot of 1,050 shares, Ms Panchal and her associates (real or fictitious) have attempted to corner the maximum possible number of shares in the IPO allotment.

This tantamount to an abuse of IPO allotment process, the SEBI order said.Â A similar modus operandi was adopted by Sugandh, which received 150 shares each from 1,315 dematerialised accounts aggregating 1, 97,250 shares in off market transactions.

According to SEBI findings, Ms Panchal and others booked profits to the tune of about Rs 1.70 crore on the day of the listing of YES Bank shares.

FLOW CHART OF THE PROCEDURE OF AN IPO

SKS Microfinance

Initial Public Offering

16,791,579 Equity Shares

PRELIMINARY SUMMARY OF THE OFFERING
Issuer:	SKS Micro Finance (“SKS”)
Type of Offering:	Initial Public Offering
Listing:	Bombay Stock Exchange and National Stock Exchange of India
Expected Issue Size:	~US$ 250 million
Offering Structure:	Total of 16,791,579 Equity Shares comprising: ► Offer for sale by selling shareholders of 9,346,256 ► At least 60% of the Total Offer will be available for Qualified Institutional Buyers (“QIBs”) (10,074,948 shares) ► Not less than 10% of the Total Offer will be available for Non-institutional Bidders (1,379,157 shares) ► Not less than 30% of the Total Offer will be available for Retail individual bidders (5,037,474 shares)
Share Type	Fresh Issue of up to 7,445,323 shares representing 44.6% of the total issue size Offer for Sale by promoter of up to 9,346,256 shares representing 55.6% of the total issue size
Greenshoe:	None
No. of Shares Out Pre-offering:	64,527,219 shares
No. of Shares Out Post-offering:	71,972,542 shares

Offer Size as % of Company:	Approximately 21.6 % of the fully diluted post issue capital
Lock-Up*:	► Lock-in of 20% of the fully diluted post-Issue paid-up equity share capital, held by it, for three years from the date of Allotment and lock-in of the balance pre-Issue equity share capital, held by it, for a period of one year from the date of Allotment
Use of Proceeds:	The issue proceeds, net of all expenses and fees, from the primary tranche will be used to augment SKS’ capital base for expansion of business and asset growth. There is also expected to be a secondary tranche / offer for sale to facilitate a partial exit for select investors including Sequoia and Kismet Capital, proceeds of which will be remitted to the selling stakeholders.
Selling Restrictions:	In the US: Rule 144A to QIBs Rest of World: Reg S
Joint-Bookrunners:	Citi, Credit Suisse, Kotak

COMPANY OVERVIEW

Company Background and Evolution

In 1998, Swayam Krushi Sangam was founded by Vikram Akula, as a non-governmental organization (NGO),that carried out microfinance activities in the Indian state of Andhra Pradesh. In 2005, SKS in its present avatar was formed by acquiring the business operations of Swayam Krushi Sangam. At the time of this acquisition, 100% of share capital of SKS was held by the borrower members through mutual benefit trusts. Later in 2005, SKS was converted into a for-profit NBFC and registered with the Reserve Bank of India, in order to broaden access to capital and increase potential outreach.

Today, SKS is the largest microfinance institution (MFI) in India in terms of total value of loans outstanding (Rs. 29,746.9 million), number of members (6.8 million) and number of branches (2,029). According to the 2008 MIX Market Global 100 Composite Ranking of microfinance institutions, SKS is the second ranked MFI in the world and the highest ranked MFI in India.

Business Model

SKS’ core business is providing small loans on an unsecured basis, exclusively to women in the lower income segment predominantly located in rural areas in India. These loans are made to members for use in their small businesses or other income generating activities and not for personal consumption. SKS utilizes a village-centric, joint liability lending model pioneered by Dr Moahammed Yunus / Grameen Bank of Bangladesh to provide loans to members. These individuals often have no or very limited access to loans from other sources other than private moneylenders that we believe typically charge very high rates of interest.

The key elements of the model are :

Identification of a village based on the local conditions and potential for operations based on several factors that include total population, poverty level, road access, political stability and safety.

Compulsory Group Training, consisting of a series of hour long sessions with visual and participatory teaching methods designed to educate the members on the concept of borrowing, processes, and procedure. On the last day, a group recognition test is administered and members are officially accepted. Many of the training sessions have everyday beneficial effects on the members such as basic education on how to sign their name, count cash and work in groups.

Formation of groups of 5 (called Sangams) and disbursement of loans to them on joint liability basis. SKS requires each member seeking a loan to submit an application in their weekly Sangam meeting that is managed by loan officers. SKS uses a standardized loan application form that must be signed by both the member and the center leader, who serves as a witness. New loan applications once complete are only accepted at a Sangam meeting in which all five members of the group to which the applicant belongs are present and a minimum of 70% of the center members are present. The application is reviewed on parameters such as the purpose of the loan, the amount, and the relevant expertise of the member in the business, as well as any past experience with prior loans. New loans are finally approved based on qualitative information about the applicant and the approval of the other members in the Sangam. SKS’ average loan size is as low as Rs. 7,000 ($150) per member, and maximum loan sizes never exceed Rs. 50,000 ($1000).

Collection. SKS’ approach to rural lending involves providing credit to borrowers at their doorsteps, rather than requiring members to travel in order to obtain loans. Meetings begin early in the morning in order not to interfere with the daily activities of members. The Sangam meetings allow SKS to regularly conduct collections and new loan transactions, reinforce group stability, address community issues and eliminate the travel and time constraints that other lenders face.

The joint liability model utilizes peer pressure within the group to ensure borrowers use caution in conducting their financial affairs with strict discipline in repaying their loans. Failure by an individual borrower to make timely loan payments will prevent other group members from being able to borrow in the future; therefore the group will typically pressure such delinquent borrowers to make timely payment or else will collectively make the payment on the defaulting borrower’s behalf, effectively providing an informal joint guarantee on the borrower’s loan.

In addition to providing loans, SKS also uses its distribution channel to help provide other services and goods. For instance, SKS also distributes and administers life insurance and endowment policies for LIC and Bajaj Allianz (micro-insurance) and have pilot programs to provide loans for purchasing select consumer products (e.g. mobile phones, solar lamps) that increase their productivity or working capital to owners of micro-grocery or Kirana stores.

SKS has witnessed very high rates of growth in its asset portfolio, driven by expansion of its geographic footprint and network of branches and members. The following table shows the loan portfolio by product as of September 30, 2009, and as of March 31, 2009, 2008 and 2007:

	*(Rs. in millions)*
	*As of March 31,*
	*2010*	*2009*	*2008*	*2007*
Income generating loans	29,158.20	13,265.37	7,203.07	2,609.55
Individual loans	-*	512.10	595.68	32.38
Life insurance loans	96.09	395.20	-	-
Productivity loans	98.96	2.56	10.14	-
Housing loans	13.95	-	-	-
Other loans	379.70	174.25	122.80	70.94
Total loan portfolio	29.746.90	307.09	169.70	2,712.87
Number of branches Number of districts Number of employees Number of members	2,029 341 21,154 6.8mn	1,353 307 12,814 3.95mn	770 219 6,818 1.87mn	276 103 2,381 0.6mn

*This business is being run-down and no fresh disbursements are intended to be made.

(Source: Red Herring Prospectus)

The following table analyses the composition of income-generating loans (IGLs), which form 97% of SKS’ loan portfolio, according to the borrower’s principal economic activity, showing a fairly well diversified type of borrowers. Interestingly agriculture constitutes a relatively low percentage of underlying activity relative to small enterprise despite the rural focus:

Economic Activity	Outstanding as on March 31, 2009 (Rs. in million)	% outstanding activity wise
Trade	8,585.85	29.2%
Services	6,973.56	23.8
Livestock	4,955.55	16.9
Production	2,779.36	9.5
Agriculture	893.49	3.0
Other Economic Activities	4,970.37	16.9
Productivity Loans	209.00	0.7
Total	29,367.20	100

(Source: Red Herring Prospectus)

SKS loan portfolio is also reasonably dispersed across geographies – the top 5 states account for ~72% of the loan portfolio as of September 30, 2009 with the home state of Andhra Pradesh (which is often regarded as the birthplace of the microfinance movement in India) contributing the largest share at 29%.

Another distinguishing feature of the IGL portfolio is that the maximum tenor stretches only upto 50 weeks. This places MFIs like SKS in a unique position, in terms of having a positive asset-liability gap within the financial services sector.

Particulars	Definition	Fiscal, 2010	Fiscal 2009	Fiscal 2008	Fiscal 2007
Gross yield	Gross revenue /Avg GLP	28.30%	31.59%	25.63%	24.65%
Interest yield	Interest revenue / Avg GLP	25.31%	28.43%	23.88%	23.44%
Financial cost ratio (1)**	Financial cost / Avg GLP	8.51%	11.09%	8.51%	7.48%
Operating cost ratio (2)	Operating costs / Avg GLP	10.36%	12.66%	12.12%	13.63%
Loan loss ratio (3)	Loan loss provision / Avg GLP	1.53%	0.77%	0.63%	1.10%
Taxes (4)	Tax expense / Avg GLP	2.74%	2.50%	1.85%	1.26%
Total expense ratio [(1)+(2)+(3)+(4)]	Total expense / Avg GLP	23.14%	27.02%	23.12%	23.46%
Return on risk assets	Profit after tax / Avg. GLP	5.16%	4.57%	2.51%	1.19%
Average GLP is computed as yearly average of opening and closing outstanding balances of loans and advances and assigned loans. * Include interest expense, loan processing fees, guarantee fees and bank charges. (Source: Draft Red Herring Prospectus)

Given the small ticket sizes and operationally intensive nature of the business, MFIs like SKS again exhibit a unique characteristic vs the rest of the financial services sector, which is that the operating expenses exceed the financial expenses. A snapshot of yields, costs and resulting profitability for SKS appears below. While ROAs are healthy at over 4%, this also explains why interest rates need to be as high to sustain the commercial viability of the business. SKS believes the poor are able to service such rates of interest since their livelihoods like small trade, livestock, pottery or tailing yield in excess of 100% return on investment given use of family labour, low infrastructure costs and absence of taxes. Accordingly, microfinance actually makes financial resources available to a credit-starved segment and in the long-term encourages asset building and entrepreneurship, ultimately leading to alleviation of poverty.

BUSINESS STRATEGY

1. Expand Membership through Increased Geographic Coverage and Penetration in Existing Markets

SKS intends to establish branches in new geographies, including areas where the first mover advantage is important to establishing brand recognition and customer loyalty. SKS will also focus on increasing membership through greater penetration in existing branches; and establish additional branches in areas that SKS is already present in where its leadership position and brand recognition can be leveraged to to increase membership penetration.

2. Expand Range of Income Generating and Productivity Loan Products

SKS is introducing newer and more innovative loan products including loans for housing, education, and the purchase of products such as mobile phones that potentially increase the productivity of a member. SKS has entered in to a strategic relationship with Nokia India where SKS extends a loan to a member for the purchase of a Nokia mobile phone. Under a pilot program with METRO Cash & Carry India, SKS provides working capital financing to members operating local retail shops called Kirana stores that purchase supplies from METRO on a wholesale basis.

3. Leverage Distribution Channels into New Revenue Streams

Currently, SKS has agency relationships with Bajaj Allianz, for the sale of their life insurance products, while meeting the protection or savings needs of members. SKS receives a fee based commission on these sales. Sale of life cover products where SKS has the first right on redemption proceeds, also protects against loan losses arising from death or accident to a member.

4. Continue to Develop Information Technology Platform and Risk Management Systems

SKS has developed and implemented a proprietary technology system that provides field level data entry, loan tracking and loan portfolio reporting on an aggregated company wide basis, which has reduced transaction costs and increased ability to manage loan applications, disbursements, duration and other member specific data. SKS intends to further develop this system to provide for real time internet based reporting from all of branches and integration with other accounting systems currently used.

5. Pursue Strategic Business Alliances

SKS believes it has unique knowledge, experience and business models that could be leveraged in other countries such as China, Sri Lanka, Thailand and Vietnam with similar demographic potential. SKS may enter into joint ventures and strategic relationships to make an entry into these markets in a measured way, in the future.

KEY SELLING POINTS

§ Market Leadership: SKS is the largest MFI in India in terms of total value of loans outstanding (Crisil report), and one of the fastest growing MFI in the world, with strong performance parameters.

§ Expertise in Microfinance: SKS is focused on lending to the poor of India since inception and enjoys a specialized understanding of the needs and behaviors of the individuals in this segment across India, the complexities of lending to these individuals and of the microfinance industry in India and its processes, providing a competitive advantage over commercial banks.

§ Diversification: While SKS’ core business is providing members with traditional loan products, SKS also offers other loans such as select retail product loans, or productivity loans, which are designed to help increase the productivity of members, and insurance. Also, SKS operations are widely distributed across India which mitigates exposure to local economic slowdowns, and disruptions resulting from political circumstances or natural disasters. SKS’ pan-India rural distribution network and access to the bottom of the social pyramid gives SKS the capability to offer a variety of financial products including insurance. SKS’ ability to aggregate volumes also provides leverage to negotiate favorable terms with institutions that want to distribute their products through the network e.g. Metro Cash and Carry which supplies provisions to micro-stores operated by members, to whom SKS provides working capital finance.

§ Superior Asset Quality : SKS structures its loans with joint group liability for each loan where everyone in the specified group is responsible for the repayment of a loan. In addition, loans are short term (typically 50 weeks) and primarily made for income generating activities or to fund increases in productivity. Finally, disbursements are progressive, so only members who have successfully demonstrated their ability to timely repay previously granted smaller loans are permitted to take on larger loans. All these features increase the likelihood that borrowers will successfully repay their loans. NPAs are less than 0.2% of outstanding loans.

§ Access to Capital : As an NBFC, SKS does not have access to low-cost retail checking accounts (as do banks) or deposits and needs to rely primarily on institutional sources of funding. It has been able to rise over $265mn in debt from more than 44 sources including 15 Public Sector Banks upto half year ending Sep 2009. While many MFIs rely almost entirely on wholesale funding from commercial banks, SKS has been able to fund the growth of operations and loan portfolio through placement of equity, issuance of private and publicly traded debt securities and securitization. In 2009, several of SKS’ debt securities have been rated by CRISIL and CARE at P1+(SO) and PR1+, respectively, which is the highest rating for such securities. SKS was the first MFI’s in India to complete a rated bond issuance, issue commercial paper, assign a rated pool, sell a “weaker section” portfolio, list a debt instrument on the BSE and complete an assignment of receivables with a public sector bank.

· Experienced Management: SKS’ management team has significant experience in the microfinance and financial services industry and has the knowledge necessary to identify and offer products and services that meet the needs of members, while maintaining effective risk management and strong margins. In addition to its Chairman, Dr. Vikram Akula, the senior management team is comprised of a Chief Executive Officer and Managing Director, Chief Operating Officer, Chief Financial Officer and Chief Information Officer, each of whom have over 15 years of experience with well reputed national and multinational companies, particularly in the retail and commercial

SUMMARY RISK FACTORS

§ Limited operating history: SKS was established in 1998 as a non-governmental organization and converted in to a for-profit non banking finance company in 2005. As a result of limited operating history, there is limited historical financial and operating information available on the company.

§ High rates of growth: SKS continues to anticipate exponential rates of growth; the network of branches and members has expanded rapidly from 80 branches serving approximately 200,000 members located in 19 districts of India as of March 31, 2006 to 1,676 branches, serving more than 5.3 million members located in 345 districts of India as of March 31, 2009. Given the anticipated level of significant growth, if SKS is unable to expand and manage financial, accounting, administrative and operational infrastructure for future expansion, this could lead to an impairment of liquidity, financial loss, disruption of business and reputational damage.

§ Non-performing loans: SKS has traditionally enjoyed very high asset quality (NPAs of 0.18% as of March, 2009), despite the fact that the business model is centered on unsecured lending based on joint liability. SKS members are typically poor, uneducated or illiterate women living in rural India, who have limited sources of income, savings and credit histories, and who cannot provide us any collateral or security for their borrowings. SKS also disburses non-interest bearing loans to members in the event of emergencies, such as unexpected pregnancy, natural disasters (such as the recent floods in SKS’s home state of Andhra Pradesh) and political strife, which are prevalent in rural India. SKS’ members are vulnerable to economic conditions and there is no precise method for predicting loan and credit losses. There is also an element of concern that the rapid pace of growth in the industry fuelled by private capital, may be leading to some indiscriminate lending and the risk of over-leverage amongst the rural poor.

§ Cash-intensive operations: SKS handles a large amount of cash through a high volume of small transactions taking place in the vast network dispersed throughout rural and semi-urban India, and is exposed to the risk of fraud or other misconduct by employees or outsiders. During the period ended September 30, 2009, SKS uncovered 33 cases of cash embezzlement by employees in the aggregate amount of Rs. 7.00 million, and 18 cases of misrepresentation by employees in the aggregate amount of Rs. 5.60 million.

· Governmental regulations: While SKS is primarily regulated by the RBI as an NBFC, there is no centralised authority or regulatory framework governing microfinance in India, given its evolutionary stage. A number of states in India have enacted laws for the regulation and control of money lending transactions which prescribe, inter alia, the maximum rates of interest that can be charged by a person lending money; for unsecured loans, these maximum rates typically range from 12% to 15% per annum across states. The RBI, however, has not prescribed a ceiling on the rate of interest that can be charged by an NBFC in the micro-finance sector and only requires that the board of all NBFCs should adopt an interest rate model taking into account relevant factors such as cost of funds, margin and risk premium. It is unclear whether the Company, as an NBFC registered with the RBI, is required to comply with the provisions of these state money lending laws that prescribe ceilings on interest rates. SKS’ interest rates (between 25-30% on an annualized basis) are substantially higher than those charged by a typical bank because of the high operating costs and unique risks associated with providing small, unsecured loans to the poor, which is a politically sensitive customer base. In the event that any such adverse developments occur, this could significantly impact results of operations and long-term sustainability.

SUMMARY FINANCIALS (as per INDIAN GAAP)

(Source: Red Herring Prospectus)

Shareholding Pattern

(Source: Red Herring Prospectus)

Dr. Vikram Akula currently doesn’t hold any shares in the Company. However, he holds stock options representing 2,676,271 shares under two different ESOP schemes and has consented to lock-in the stock options for a period of three years.

Profiles of Key Shareholders

Sequoia Capital was founded 1972 and credited with their partnerships/investments in leading innovators like Apple Computer, Oracle, Yahoo, Google and You Tube. Sequoia Capital India manages three funds totaling $750million.

Mutual Benefit Trusts were originally formed when SKS Microfinance was converted into an NBFC from its erstwhile NGO/Trust form. There are 5 such trusts, representing the beneficial interests of original borrowers of SKS and are intended to utilize benefits from ownership (dividends/sale proceeds) for benefit of the communities serviced by SKS. SKS Trust Advisors Private Limited (“STAPL”) acts as trustee, with Dr Vikram Akula as the chairperson.

Kismet Capital is a mezzanine and private equity investor in asset-based businesses located in emerging Asian markets. Kismet was found in 2004 and has operations in New York, Mumbai and Bangkok.

The Unitus Equity Fund (UEF) is managed by Elevar, a global growth investor focused on social investing at the base of the pyramid in developing countries.

Sandstone Capital is a long-term investor in public and private companies in India and the subcontinents founded in 2005. Sandstone is one of the largest Indian dedicated funds with a worldwide investor base that includes university endowments, public and private foundations, family offices, individual investors and other institutions.

Vinod Khosla is an Indian-American venture capitalist and co-founder of Sun Microsystems, and former partner at Kleiner Perkins.

Last Transactions of key Shareholders

March 2010 – 937,770 shares to Catamaran management Services (Narayan Murthy) for INR 300/shares

Feb 2010- 945,424shares to Tree Line from Dr. Vikram Akula for US$ 13.67/share implying a value of ~US$880 mn

Dec 2009- 1,250,000 shares to BALICL for INR300/share

Dec 2009- 6,256,344 shares to Sandstone for INR300/share

Jan 2008- 807,461 shares to SIDBI for INR70.67/share

Jan 2008- 2,274,020 shares to Unitus for INR70.67/share

Jan 2008- 3,678,027 shares to Kismet for INR70.67/share

Jan 2008- 2,996,396 shares to Sequoia for INR70.67/share

Source :( Red Herring Prospectus)

COMPARABLES

(Source: Bloomberg consensus estimates)

CONCLUSION:

SKSML is one of the largest players in the Indian micro finance industry having pan India operations with a well-diversified portfolio. It has a track record of the promoters, experienced board of directors and strong management profile. The company has the strong financial position with health margins including good asset quality, comfortable capital adequacy ratio, comfortable liquidity position and access to diverse sources of institutional funding. It has the strong industry growth in recent period with good prospects for future growth on account of large unmet potential demand. The company is sensitivity to operational risk on account of large volume of cash transaction & decentralized operations spread across the country. Any adverse change in government policies, low seasoning of the industry portfolio and asset quality risks on account of political/religious intervention is some key risks that it faces. However some of these risks are mitigated due to the high diversification of SKSML’s asset portfolio. The salary costs of SKSML are high given its business model. Further dependence on improvement in rural conditions is high as any setback in terms of monsoon failure or floods etc could jack up the NPA rates. Possibility of some sort of regulation on the interest rates charged going into future is another concern.

The microfinance industry has large portfolio concentration in southern states of India. SKSML’s has good geographical diversification with a large coverage in eastern and western states along with the southern states (55.8% of its loan portfolio as on Mar 31, 2010 comes from AP, West Bengal and Karnataka.

Also the vast, rural level loan distribution and collection network of the company provides an opportunity to diversify into other products by leveraging this network. The core business of the company is microfinance lending. It is planning to leverage the large distribution network to diversify its revenue streams in future. It has strategic alliance with Nokia, Bajaj Allianz, HDFC Ltd, METRO cash & carry, Future Agrovet Ltd and others to provide various offerings, which could increase its revenues going forward.

BIBLIOGRAPHY

Ranking from Prime DataBase

Ranking of various IPO’s from Registrar like:

Ø Karvy ComputerShare Registry Ltd.

Ø Intime Spectrum Registry Ltd.

Ø Big Share Online Registry Ltd.

Books and Magazine-

Ø Indian Capital Markets

Ø Financial management –Prasanna Chandra

Ø Business World

Ø The Chartered Accountant-

Journal of Institute of Chartered Accountants in India

Ø NCFM [Basic Module]- Book

Websites-

Ø www.indiainfoline.com

Ø www.sify.com

Ø ww.moneycontrol.com

Ø www.sebi.gov.in

Ø www.domain-b. Com

Ø www.business-standard.com

Ø www.google.com

Ø www.nseindia.com

Ø www.bseindia.com

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STUDY OF INITIAL PUBLIC OFFERING

Chapter 1

Chapter 2

Chapter 3

Chapter 4

Chapter 5

Chapter 6

Chapter 7

Chapter 8

Chapter 9

Chapter 10

Chapter 11

Chapter 12

Chapter 13

Chapter 14

Chapter 15