Selection of Merchant Banker
Engaging the right Merchant Banker who understands the philosophy, business model and wave-length of the SME Company and its promoters is the most important step in the IPO process. One of the foremost role of the merchant banker is due diligence and preparation of draft offer document. This assumes increased importance, as SME IPO does not require the Draft offer document to be cleared by SEBI.
Another major role of the merchant banker is to chalk-out the IPO strategy and market the issue. Merchant banker needs to ensure 100% underwriting, including 15% underwriting out of its own account, for any SME IPO. Thirdly, the merchant banker plays an important role in selecting right market makers for the company’s scrip. Choosing and using all the intermediaries is a great challenge for any merchant banker.
Due Diligence as part of IPO
Due diligence is required to be conducted on various approvals and regulations that a corporate is required to comply. The risk factors associated with the company and the external environment have to be very clearly understood. The applicability of certain regulations needs to be clearly mentioned. The litigations have to be listed out and their relative magnitude be analyzed by the corporate but left to the judgment of the legal people. Proper due diligence with full and truthful disclosure of profits will help in getting better valuation to the Company. Before coming for listing on Exchanges, improve Operating Profit Margins, Profit Margins, EPS (Earning per Share), Cash Flow of company. Industry Price/Equity (P/E) Ratio and Goodwill are some of the critical items considered for valuation of the company. Net worth of the company and Debt/Equity ratio are important to decide the extent of equity capital that the SMEs can raise from the capital markets. The companies are advised to dilute the equity in phases at different stages of their growth, instead of diluting large equity upfront. This will help them to raise optimal capital from markets for their growth and expansion.
Indian Capital Markets are governed by disclosure-based Regulations. Hence, detailed disclosures on various aspects of a company are must. Some of the important disclosures required in an SME IPO include the following:
- Audited Annual Reports.
- Peer Review by Reputed Chartered Accountant firms (since its inception or last 3 years, whichever is shorter).
- Due diligence on the applicability of various regulations.
- Due Diligence on various approvals required from regulatory bodies.
- Detailed disclosures about the profile of the company.
- Detailed disclosures on Promoters & Management.
- Detailed disclosures about the Past Performance of the company.
- Detailed disclosures about the Risk Factors associated with the company.
- Detailed disclosures about the External Environment affecting the company.
- Detailed disclosures about litigations and documenting its magnitude and ramifications.
- Detailed disclosures about the Business activity, Industry background, competition and business environment.
- Objects of the issue and issue structure.
- Future plans and strategy of the company.
- Management's discussion and analysis of the financial results.
Material Contracts
Some of the Material Contracts are listed below:
- Mandate Letter signed between the lead manager and the Company
- Issue / Offer Agreement between the Lead Manager and the Company
- Agreement between the Company and the Registrar to the Issue / Offer
- Public Issue Account Agreement between the Company, the Lead Manager, the Banker to Issue/Public Issue Bank/Refund Banker/Sponsor Banker, and the Registrar to the Issue / Offer
- Underwriting Agreement between the Company and the Lead Manager
- Market Making Agreement between the Company, Lead Manager and the Market Make
- Agreement with the Depositories, the Company and Registrar to Issue
Material Documents
Some of the Material Documents are listed below:
- Certified True Copy of the Memorandum and Articles of Association of the Company, as amended from time to time including certificates of incorporation.
- Copy of Board Resolution and Special Resolution authorizing the issue.
- Statement of Tax Benefits issued by Statutory Auditor
- Report of the Peer Review Auditor
- Consents of Promoters, Directors, Company Secretary and Compliance Officer, Chief Financial Officer, Statutory Auditors, Banker to our Company, Lenders, the Lead Manager, Underwriter, Registrar to the Issue / Offer, Market Maker to the Issue / Offer, Peer Review Auditor, Legal Advisor, Banker to the Issue/Public Issue Bank, Refund Banker to the Issue, Sponsor Bank to the Issue, to act in their respective capacities.
- Copy of approval from NSE to use the name of NSE in the offer document for listing of Equity Shares on NSE Emerge Platform.
- Due Diligence Certificate from the Lead Manager.
- Copy of Managing Director Agreement for his appointment.
Promoters and Management
- Quality experience, qualifications, reporting structures, composition of Board of Directors.
- Quality of human resources.
- Details of Key Management.
- Pledge details.
Preparation of Draft Offer Document
The Draft offer document explains the company's competitive strengths, strategy and market opportunity. The Draft offer document also informs investors of the risks relating to the company in order to protect the company and its directors from potential liability.
The Draft offer document is the main marketing document for any IPO and SME IPO is no exception. Therefore, it is important that the Draft offer document is prepared with utmost diligence and by merchant bankers with professional team having technical knowledge and domain business expertise.
The Draft offer document should not contain statements that are ambiguous or not supportable. This involves checking that each statement in the Draft offer document has a legitimate source. Otherwise, the company and the directors may be liable for any misleading statements in the Draft offer document.
Marketing Strategy and Targeting Potential Investors
The next step in the listing process is to target and meet key potential investors. This is an opportunity for senior management and advisers to meet with potential investors and persuade them to invest in the company.
This typically involves a number of presentations to institutional investors, as well as one-on-one meetings with key potential investors. It is important that potential investors should come away from this meeting with a clear understanding of, and enthusiasm for the company's business and prospects.
Along with the direct efforts, a sustained media effort including visual media, regular interaction with the brokers, large institutional investors and high net worth individuals is necessary to create awareness about the public issue. It is also important that the industry news and the story relating to company needs to be well positioned. Selection of bidding centers should be done by identifying the investors' centres and brokers so that maximum investors can participate in the bidding process. Targeting the key potential investors will help save time and cost of marketing.
Pillars of successful Marketing Strategy
- Effective equity story supplemented by proper research and proper documents.
- Presentations to the investors and the analysts; and consider their feedback.
- Creating sustainable valuation and sustainable shareholder base.
- Effective communication for better results.
Appointment of other Intermediaries
Apart from the Merchant Banker to the issue, there are various other intermediaries involved in the process of listing. The same have been listed as below;
Syndicate Members
The Book Runner(s) may appoint those intermediaries who are registered with the Board and who are permitted to carry on activity as an 'Underwriter' as syndicate members. The syndicate members are mainly appointed to collect the bid forms in a book built issue.
The Registrar finalizes the list of eligible allotees after deleting the invalid applications and ensures that the corporate action for crediting of shares to the Demat accounts of the applicants is done and the dispatch of refund orders to those applicable are sent. The Lead manager coordinates with the Registrar to ensure follow up so that that the flow of applications from collecting bank branches, processing of the applications and other matters till the basis of allotment is finalized, dispatch security certificates and refund orders completed and securities listed.
Bankers to the Issue
Bankers to the issue, as the name suggests, carries out all the activities of ensuring that the funds are collected and transferred to the Escrow accounts. The Lead Merchant Banker shall ensure that Bankers to the Issue are appointed in all the mandatory collection centers as specified in SEBI ICDR Regulations 2018. The Lead Merchant Banker also ensures follow-up with bankers to the issue to get quick estimates of collection and advising the issuer about closure of the issue, based on the correct figures.
Issue Stationery Printers
These are firms that specialize in printing of issue stationery-offer documents, abridged prospectus and application forms, and in subsequently dispatching these to the designated points.
Filing of Draft offer document with Exchange and others
With a view to quicken the process of listing, the SEBI has delegated the powers to Exchange with respect to approving the Draft Red Herring Prospectus / Draft Prospectus.
Issue Pricing and Allocation
Like a main board listing, Initial Public Offering in SME Exchange can be made either through the fixed price method or book building method.
Listing and Market Making
In comparison to the main board listing, SEBI has made it mandatory to have market maker for all the scrips listed on SME Platform.