Structuring a Public Issue

One of the responsibilities of an investment banker is to set up the basic ground rules which will have to be followed while going public. Some of these rules are imposed by regulatory and governing bodies, whereas some other rules are self-imposed. The setting up of all these rules and communicating it to the relevant parties is called structuring a public issue. In this article, we will have a closer look at some of the rules which are followed while structuring a public issue.

Before we look at the issue structure, let us clarify the meanings of some important jargon, which are often used while explaining these rules.

Issue Size: Regulatory bodies all over the world have certain rules about how shares issued in a public issue are to be allocated. They are generally allocated in one of the three ways.

• They are issued to the promoters or their associates.

• They are issued to financial institutions on a firm allotment basis. This means that the financial institutions do not have to go through the bidding process and their shares are not proportionately allocated. Instead, if they apply for 100 shares, 100 shares are simply given to them.

• Lastly, shares can be issued to the general public based on the number of applications received. Shares may have to be apportioned between shareholders in case the issue is oversubscribed. For instance, it is likely that an investor may bid for 100 shares and only receive 80.

In the first two cases, shares are generally allocated at a higher price as compared to the general public.

Gross Public Offer: Now, as we can see from the definition above that not all shares in the public issue are available to the public at large. This is because the first category of shares mentioned above will be held by the promoters themselves. They will not be issued to the general public. This is the reason that the second and third categories of shares, i.e., shares for financial institutions and retail investors, are together called the gross public offer.

Net Public Offer: Not all shares listed in the gross public offer are bid upon. This is because the shares issued to financial institutions are on a firm allotment basis. Hence, the number of shares on which bidding actually takes place is called the net public offer. This includes only the shares which are available to the retail investors.

Hence, when an IPO takes place, the company may want to sell 100 shares, out of which 10 shares will be purchased by the promoters. Another 20 shares will be purchased by financial institutions on a firm allotment basis. Hence, the net offer will be only for the balance 70 shares. These balance 70 shares are the ones on which the bidding will finally take place.

Common Conditions in Public Issue Structuring

• During a public issue, investment banks are supposed to mention the face value of the shares that will be issued. In the case of book built issues, they cannot give out a market price in the very beginning, but they can give out a floor price below which they will not sell their issue. The investment banks have to inform the public about the premium that has been collected from the sale of shares and also keep it in a separate account.

• Investment bankers have to define the minimum as well as the maximum amount of bids they will accept. There is a need to set the minimum amount otherwise, the company will have to process very small bids. On the other hand, they don’t want to sell all the shares to a single investor. Hence, they also provide the maximum limit, which they will allot to an investor.

• Investment bankers also have to fix the terms of payment. This means that they have to create a mechanism by which they accept the initial payment. Then after the cut-off price has been derived after book building, they can either collect more money or refund existing money based on the cut-off price. The number of days in which these transfers will be done, as well as the acceptable modes of payment, need to be mentioned by investment bankers.

• Every country has its own laws about how many shares can be issued to promoters as well as directly to institutions on a firm commitment basis. The investment bankers have to make sure that the issue is compliant with these laws. Also, details about the different types of allocation of shares have to be clearly mentioned in the prospectus.

• The costs and budgets related to the public issue also have to be outlined in the public structure. The investing population has a right to know how much of their proceeds will go to the issuing company and how much will go to the mediators.

Issue structuring may be thought of as a mundane or administrative task. However, in reality, it is quite important to be compliant with the law for an IPO issue to be successful.