Stock and Bond Offerings

Stock and Bond Offerings

Initial Public Offerings:

An initial public offering (IPO) is the process by which a private company

transforms itself into a public company. The company offers, for the first

time, shares of its equity (ownership) to the investing public. These shares

subsequently trade on a public stock exchange like the New York Stock

Exchange (NYSE) or the Nasdaq.

The first question you may ask is why a company would want to go public.

Many private companies succeed remarkably well as privately owned

enterprises. One privately held company, Cargill books more than $60

billion in annual revenue. And until 1999, Wall Street’s leading investment

bank, Goldman Sachs, was a private company. However, for many large or

growing private companies, a day of reckoning comes for the owners when

they decide to sell a portion of their ownership in their firm to the public.

The primary reason for going through the rigors of an IPO is to raise cash

to fund the growth of a company and to increase the company’s ability to

make acquisitions using stock. For example, industry observers believe

that Goldman Sachs’ partners wished to at least have available a publicly

traded currency (the stock in the company) with which to acquire other

financial services firms.

While obtaining growth capital is the main reason for going public, it is not

the only reason. Often, the owners of a company may simply wish to cash

out either partially or entirely by selling their ownership in the firm in the

offering. Thus, the owners will sell shares in the IPO and get cash for their

equity in the firm. Or, sometimes a company’s CEO may own a majority

or all of the equity, and will offer a few shares in an IPO in order to diversify

his/her net worth or to gain some liquidity. To return to the example of

Goldman Sachs, some felt that another driving force behind the partners’

decision to go public was the feeling that financial markets were at their

peak, and that they could get a good price for their equity in their firm. It

should be noted that going public is not a slam dunk. Firms that are too small, too stagnant or have poor growth prospects will – in general – fail to

find an investment bank (or at least a top-tier investment bank, known as a

“bulge bracket” firm) willing to underwrite their IPOs.

From an investment banking perspective, the IPO process consists of these

three major phases: hiring the mangers, due diligence, and marketing.

Hiring the managers. The first step for a company wishing to go public is

to hire managers for its offering. This choosing of an investment bank is

often referred to as a “beauty contest.” Typically, this process involves

meeting with and interviewing investment bankers from different firms,

discussing the firm’s reasons for going public, and ultimately nailing down

a valuation. In making a valuation, I-bankers, through a mix of art and

science, pitch to the company wishing to go public what they believe the

firm is worth, and therefore how much stock it can realistically sell. Perhaps

understandably, companies often choose the bank that predict the highest

valuation during this beauty contest phase instead of the best-qualified

manager. Almost all IPO candidates select two or more investment banks

to manage the IPO process. The primary manager is known as the “lead

manager,”while additional banks are known as “co-managers.”

Due diligence and drafting. Once managers are selected, the second

phase of the IPO process begins. For investment bankers on the deal, this

phase involves understanding the company’s business as well as possible

scenarios (called due diligence), and then filing the legal documents as

required by the SEC. The SEC legal form used by a company issuing new

public securities is called the S-1 (or prospectus) and requires quite a bit of

effort to draft. Lawyers, accountants, I-bankers, and of course company

management must all toil for countless hours to complete the S-1 in a timely

manner. The final step of filing the completed S-1 usually culminates at

“the printer” (see sidebar in Chapter 8).

Marketing. The third phase of an IPO is the marketing phase. Once the

SEC has approved the prospectus, the company embarks on a roadshow to

sell the deal. Aroadshow involves flying the company’s management coast

to coast (and often to Europe) to visit institutional investors potentially

interested in buying shares in the offering. Typical roadshows last from two

to three weeks, and involve meeting literally hundreds of investors, who

listen to the company’s canned PowerPoint presentation, and then ask

scrutinizing questions. Insiders say money managers decide whether or not

to invest thousands of dollars in a company within just a few minutes into

a presentation.

The marketing phase ends abruptly with the placement and final “pricing”

of the stock, which results in a new security trading in the market.

Investment banks earn fees by taking a percentage commision (called the

“underwriting discount,” usually around 8 percent for an IPO) on the

proceeds of the offering. Successful IPOs will trade up on their first day

(increase in share price). Young public companies that miss their numbers

are dealt with harshly by institutional investors, who not only sell the stock,

causing it to drop precipitously, but also quickly lose confidence in the

management team.

Follow-on Offerings of Stock:

A company that is already publicly traded will sometimes sell stock to the

public again. This type of offering is called a follow-on offering, or a

secondary offering. One reason for a follow-on offering is the same as a

major reason for the initial offering: a company may be growing rapidly,

either by making acquisitions or by internal growth, and may simply require

additional capital.

Another reason that a company would issue a follow-on offering is similar

to the cashing out scenario in the IPO. In a secondary offering, a large

existing shareholder (usually the largest shareholder, say, the CEO or

founder) may wish to sell a large block of stock in one fell swoop. The

reason for this is that this must be done through an additional offering

(rather than through a simple sale on the stock market through a broker), is

that a company may have shareholders with “unregistered” stock who wish

to sell large blocks of their shares. By SEC decree, all stock must first be

registered by filing an S-1 or similar document before it can trade on a

public stock exchange. Thus, pre-IPO shareholders who do not sell shares

in the initial offering hold what is called unregistered stock, and are

restricted from selling large blocks unless the company registers them.

(The equity owners who hold the shares sold in an offering, whether it be

an IPO or a follow-on, are called the selling shareholders.)

Market reaction. What happens when a company announces a secondary

offering indicates the market’s tolerance for additional equity. Because

more shares of stock “dilute” the old shareholders, and “dumps” shares of

stock for sale on the market, the stock price usually drops on the

announcement of a follow-on offering. Dilution occurs because earnings

per share (EPS) in the future will decline, simply based on the fact that more

shares will exist post-deal. And since EPS drives stock prices, the share

price generally drops.

The process. The follow-on offering process differs little from that of an

IPO, and actually is far less complicated. Since underwriters have already

represented the company in an IPO, a company often chooses the same

managers, thus making the hiring the manager or beauty contest phase

much simpler. Also, no real valuation work is required (the market now

values the firm’s stock), a prospectus has already been written, and a roadshow presentation already prepared. Modifications to the prospectus and the roadshow demand the most time in a follow-on offering, but still can usually be completed with a fraction of the effort required for an initial offering.

Bond Offerings:

When a company requires capital, it sometimes chooses to issue public

debt instead of equity. Almost always, however, a firm undergoing a public

bond deal will already have stock trading in the market. (It is relatively

rare for a private company to issue bonds before its IPO.)

The reasons for issuing bonds rather than stock are various. Perhaps the

stock price of the issuer is down, and thus a bond issue is a better

alternative. Or perhaps the firm does not wish to dilute its existing

shareholders by issuing more equity. Or perhaps a company is quite

profitable and wants the tax deduction from paying bond interest, while

issuing stock offers no tax deduction. These are all valid reasons for issuing

bonds rather than equity. Sometimes in down markets, investor appetite for

public offerings dwindles to the point where an equity deal just could not

get done (investors would not buy the issue).

The bond offering process resembles the IPO process. The primary

difference lies in: (1) the focus of the prospectus (a prospectus for a bond

offering will emphasize the company’s stability and steady cash flow,

whereas a stock prospectus will usually play up the company’s growth and

expansion opportunities), and (2) the importance of the bond’s credit rating (the company will want to obtain a favorable credit rating from a debt rating

agency like S&P or Moody’s, with the help of the “credit department” of

the investment bank issuing the bond; the bank’s credit department will

negotiate with the rating agencies to obtain the best possible rating). As

covered in Chapter 5, the better the credit rating – and therefore, the safer

the bonds – the lower the interest rate the company must pay on the bonds

to entice investors to buy the issue. Clearly, a firm issuing debt will want

to have the highest possible bond rating, and hence pay a lower interest rate

(or yield).

As with stock offerings, investment banks earn underwriting fees on bond

offerings in the form of an underwriting discount on the proceeds of the

offering. The percentage fee for bond underwriting tends to be lower than

for stock underwriting. For more detail on your role as an investment banker

in stock and bond offerings, see Chapter 8.

Repo & Reverse Repo

Repo & Reverse Repo

Whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the rate at which our banks borrow rupees from RBI. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive.

When RBI lends money to bankers against approved securities for meeting their day to day requirements or to fill short term gap. It takes approved securities as security and lends money. These types of operations are generally for overnight operations.

The Reserve Bank of India (RBI) has hiked the repo and reverse repo rate
by 25 basis points (100 bps=1%).

Repurchase agreement

A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is the sale of securities together with an agreement for the seller to buy back the securities at a later date. The repurchase price should be greater than the original sale price, the difference effectively representing interest, sometimes called the repo rate. The party that originally buys the securities effectively acts as a lender. The original seller is effectively acting as a borrower, using their security as collateral for a secured cash loan at a fixed rate of interest.
A repo is equivalent to a cash transaction combined with a forward contract. The cash transaction results in transfer of money to the borrower in exchange for legal transfer of the security to the lender, while the forward contract ensures repayment of the loan to the lender and return of the collateral of the borrower. The difference between the forward price and the spot price is effectively the interest on the loan while the settlement date of the forward contract is the maturity date of the loan.

Structure and terminology

A repo is economically similar to a secured loan, with the buyer (effectively the lender or investor) receiving securities as collateral to protect him against default by the seller. The party who initially sells the securities is effectively the borrower. Almost any security may be employed in a repo, though highly liquid securities are preferred as they are more easily disposed of in the event of a default and, more importantly, they can be easily obtained in the open market where the buyer has created a short position in the repo security by a reverse repo and market sale; by the same token, illiquid securities are discouraged. Treasury or Government bills, corporate and Treasury/Government bonds, and stocks may all be used as "collateral" in a repo transaction. Unlike a secured loan, however, legal title to the securities passes from the seller to the buyer. Coupons (interest payable to the owner of the securities) falling due while the repo buyer owns the securities) are, in fact, usually passed directly onto the repo seller. This might seem counterintuitive, as the legal ownership of the collateral rests with the buyer during the repo agreement. The agreement might instead provide that the buyer receives the coupon, with the cash payable on repurchase being adjusted to compensate, though this is more typical of sell/buybacks.
Although the transaction is similar to a loan, and its economic effect is similar to a loan, the terminology differs from that applying to loans: the seller legally repurchases the securities from the buyer at the end of the loan term. However a key aspect of repos is that they are legally recognised as a single transaction (important in the event of counterparty insolvency) and not as a disposal and a repurchase for tax purposes.
The following table summarizes the terminology:

	Repo	Reverse repo
Participant	Borrower Seller Cash receiver	Lender     Buyer     Cash provider
Near leg	Sells securities	Buys securities
Far leg	Buys securities	Sells securities

Types of repo and related products

There are three types of repo maturities: overnight, term, and open repo. Overnight refers to a one-day maturity transaction. Term refers to a repo with a specified end date. Open simply has no end date. Although repos are typically short-term, it is not unusual to see repos with a maturity as long as two years.
Repo transactions occur in three forms: specified delivery, tri-party, and held in custody. The third form is quite rare in developing markets primarily due to risks. The first form requires the delivery of a prespecified bond at the onset, and at maturity of the contractual period. Tri-party essentially is a basket form of transaction, and allows for a wider range of instruments in the basket or pool. Tri-party utilizes a tri-party clearing agent or bank and is a more efficient form of repo transaction.

Due bill/hold in-custody repo

In a due bill repo, the collateral pledged by the (cash) borrower is not actually delivered to the cash lender. Rather, it is placed in an internal account ("held in custody") by the borrower, for the lender, throughout the duration of the trade. This has become less common as the repo market has grown, particularly owing to the creation of centralized counterparties. Due to the high risk to the cash lender, these are generally only transacted with large, financially stable institutions.

Tri-party repo

The distinguishing feature of a tri-party repo is that a custodian bank or international clearing organization, the tri-party agent, acts as an intermediary between the two parties to the repo. The tri-party agent is responsible for the administration of the transaction including collateral allocation, marking to market, and substitution of collateral. In the US, the two principal tri-party agents are The Bank of New York Mellon and JP Morgan Chase. The size of the US tri-party repo market peaked in 2008 before the worst effects of the crisis at approximately $2.8 trillion and by mid 2010 was about $1.6 trillion. As tri-party agents administer hundreds of billions of US$ of collateral, they have the scale to subscribe to multiple data feeds to maximise the universe of coverage. As part of a tri-party agreement the three parties to the agreement, the tri-party agent, the repo buyer and the repo seller agree to a collateral management service agreement which includes an "eligible collateral profile". It is this "eligible collateral profile" that enables the repo buyer to define their risk appetite in respect of the collateral that they are prepared to hold against their cash. For example a more risk averse repo buyer may wish to only hold "on-the-run" government bonds as collateral. In the event of a liquidation event of the repo seller the collateral is highly liquid thus enabling the repo buyer to sell the collateral quickly. A less risk averse repo buyer may be prepared to take non investment grade bonds or equities as collateral, these may be less liquid and may suffer a higher price volatility in the event of a repo seller default, making it more difficult for the repo buyer to sell the collateral and recover their cash. The tri-party agents are able to offer sophisticated collateral eligibility filters which allow the repo buyer to create these "eligible collateral profiles" which can systemically generate collateral pools which reflect the buyer's risk appetite. Collateral eligibility criteria could include asset type, issuer, currency, domicile, credit rating, maturity, index, issue size, average daily traded volume, etc. Both the lender (repo buyer) and borrower (repo seller) of cash enter into these transactions to avoid the administrative burden of bi-lateral repos. In addition, because the collateral is being held by an agent, counterparty risk is reduced. A tri-party repo may be seen as the outgrowth of the due bill repo, in which the collateral is held by a neutral third party.

Whole loan repo

A whole loan repo is a form of repo where the transaction is collateralized by a loan or other form of obligation (e.g. mortgage receivables) rather than a security.

Equity repo

The underlying security for many repo transactions is in the form of government or corporate bonds. Equity repos are simply repos on equity securities such as common (or ordinary) shares. Some complications can arise because of greater complexity in the tax rules for dividends as opposed to coupons.

Sell/buy backs and buy/sell backs

A sell/buy back is the spot sale and a forward repurchase of a security. It is two distinct outright cash market trades, one for forward settlement. The forward price is set relative to the spot price to yield a market rate of return. The basic motivation of sell/buy backs is generally the same as for a classic repo, i.e. attempting to benefit from the lower financing rates generally available for collateralized as opposed to non-secured borrowing. The economics of the transaction are also similar with the interest on the cash borrowed through the sell/buy back being implicit in the difference between the sale price and the purchase price.
There are a number of differences between the two structures. A repo is technically a single transaction whereas a sell/buy back is a pair of transactions (a sell and a buy). A sell/buy back does not require any special legal documentation while a repo generally requires a master agreement to be in place between the buyer and seller (typically the SIFMA/ICMA commissioned Global Master Repo Agreement (GMRA)). For this reason there is an associated increase in risk compared to repo. Should the counterparty default, the lack of agreement may lessen legal standing in retrieving collateral. Any coupon payment on the underlying security during the life of the sell/buy back will generally be passed back to the seller of the security by adjusting the cash paid at the termination of the sell/buy back. In a repo, the coupon will be passed on immediately to the seller of the security.
A buy/sell back is the equivalent of a "reverse repo".

Securities lending

In securities lending, the purpose is to temporarily obtain the security for other purposes, such as covering short positions or for use in complex financial structures. Securities are generally lent out for a fee and securities lending trades are governed by different types of legal agreements than repos.
Repos have traditionally been used as a form of collateralized loan and have been treated as such for tax purposes. Modern Repo agreements, however, often allow the cash lender to sell the security provided as collateral and substitute an equivalent security at repurchase. In this way the cash lender acts as a security borrower and the Repo agreement can be used to take a short position in the security very much like a security loan might be used.

Reverse Repo

A reverse repo is simply the same repurchase agreement from the buyer's viewpoint, not the seller's. Hence, the seller executing the transaction would describe it as a "repo", while the buyer in the same transaction would describe it a "reverse repo". So "repo" and "reverse repo" are exactly the same kind of transaction, just described from opposite viewpoints. The term "reverse repo and sale" is commonly used to describe the creation of a short position in a debt instrument where the buyer in the repo transaction immediately sells the security provided by the seller on the open market. On the settlement date of the repo, the buyer acquires the relevant security on the open market and delivers it to the seller. In such a short transaction the seller is wagering that the relevant security will decline in value between the date of the repo and the settlement date.

Uses

For the buyer, a repo is an opportunity to invest cash for a customized period of time (other investments typically limit tenures). It is short-term and safer as a secured investment since the investor receives collateral. Market liquidity for repos is good, and rates are competitive for investors. Money Funds are large buyers of Repurchase Agreements.
For traders in trading firms, repos are used to finance long positions, obtain access to cheaper funding costs of other speculative investments, and cover short positions in securities.
In addition to using repo as a funding vehicle, repo traders "make markets". These traders have been traditionally known as "matched-book repo traders". The concept of a matched-book trade follows closely to that of a broker who takes both sides of an active trade, essentially having no market risk, only credit risk. Elementary matched-book traders engage in both the repo and a reverse repo within a short period of time, capturing the profits from the bid/ask spread between the reverse repo and repo rates. Presently, matched-book repo traders employ other profit strategies, such as non-matched maturities, collateral swaps, and liquidity management.

United States Federal Reserve use of repos

Repurchase agreements when transacted by the Federal Open Market Committee of the Federal Reserve in open market operations adds reserves to the banking system and then after a specified period of time withdraws them; reverse repos initially drain reserves and later add them back. This tool can also be used to stabilize interest rates, and the Federal Reserve has used it to adjust the Federal funds rate to match the target rate.
Under a repurchase agreement ("RP" or "repo"), the Federal Reserve (Fed) buys U.S. Treasury securities, U.S. agency securities, or mortgage-backed securities from a primary dealer who agrees to buy them back, typically within one to seven days; a reverse repo is the opposite. Thus the Fed describes these transactions from the counterparty's viewpoint rather than from their own viewpoint.
If the Federal Reserve is one of the transacting parties, the RP is called a "system repo", but if they are trading on behalf of a customer (e.g. a foreign central bank) it is called a "customer repo". Until 2003 the Fed did not use the term "reverse repo"—which it believed implied that it was borrowing money (counter to its charter)—but used the term "matched sale" instead.

Risks

While classic repos are generally credit-risk mitigated instruments, there are residual credit risks. Though it is essentially a collateralized transaction, the seller may fail to repurchase the securities sold at the maturity date. In other words, the repo seller defaults on his obligation. Consequently, the buyer may keep the security, and liquidate the security in order to recover the cash lent. The security, however, may have lost value since the outset of the transaction as the security is subject to market movements. To mitigate this risk, repos often are over-collateralized as well as being subject to daily mark-to-market margining. Conversely, if the value of the security rises there is a credit risk for the borrower in that the creditor may not sell them back. If this is expected to happen then the borrower may negotiate a repo which is under-collateralized. Credit risk associated with repo is subject to many factors: term of repo, liquidity of security, the strength of the counterparties involved, etc.
Repo transactions came into focus within the financial press due to the technicalities of settlements following the collapse of Refco. Occasionally, a party involved in a repo transaction may not have a specific bond at the end of the repo contract. This may cause a string of failures from one party to the next, for as long as different parties have transacted for the same underlying instrument. The focus of the media attention centers on attempts to mitigate these failures.

History

In the US, Repos have been used from as early as 1917 when war time taxes made older forms of lending less attractive. At first Repos were used just by the Federal reserve to lend to other banks, but the practice soon spread to other market participants. The use of Repos expanded in the 1920s, fell away through the Great depression and WWII , then expanded once again in the 1950s, enjoying rapid growth in the 1970s and 1980s in part due to computer technology.

 Market size

The US Federal Reserve and the European Repo Council (a body of the International Capital Market Association) both try to estimate the size of their respective repo markets. At the end of 2004, the U.S. repo market reached US$5 trillion.
The European repo market has experienced consistent growth over the past five years, from €1.9 billion in 2001 to €6.4 trillion by the end of 2006, and is expected to continue significant growth due to Basel II, according to a 2007 Celent report entitled “The European Repo Market”
Especially in the US and to a lesser degree in Europe, the repo market contracted in 2008 as a result of the financial crisis. But by mid 2010 the market had largely recovered and at least in Europe had grown to exceed its pre-crisis peak.
Other countries including Chile, India, Japan, Mexico, Hungary, Russia, China, and Taiwan, have their own repo markets, though activity varies by country, and no global survey or report has been compiled.

BUYBACK

BUYBACK

Introduction

The buying back of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies will buyback shares either to increase the value of shares still available (reducing supply), or to eliminate any threats by shareholders who may be looking for a controlling stake. 

A buyback is a method for company to invest in itself since they can't own themselves. Thus, buybacks reduce the number of shares outstanding on the market which increases the proportion of shares the company owns. Buybacks can be carried out in two ways:

1. Shareholders may be presented with a tender offer whereby they have the option to submit (or tender) a portion or all of their shares within a certain time frame and at a premium to the current market price. This premium compensates investors for tendering their shares rather than holding on to them.
2. Companies buy back shares on the open market over an extended period of time. 
Objectives of Buy Back: Shares may be bought back by the company on account of one or more of the following reasons
i. To increase promoters holding
ii. Increase earning per share
iii. Rationalise the capital structure by writing off capital not represented by available assets.
iv. Support share value
v. To thwart takeover bid
vi. To pay surplus cash not required by business
Infact the best strategy to maintain the share price in a bear run is to buy back the shares from the open market at a premium over the prevailing market price.
Resources of Buy Back
A Company can purchase its own shares from
(i) free reserves; Where a company purchases its own shares out of free reserves, then a sum equal to the nominal value of the share so purchased shall be transferred to the capital redemption reserve and details of such transfer shall be disclosed in the balance-sheet or
(ii) securities premium account; or
(iii) proceeds of any shares or other specified securities. A Company cannot buyback its shares or other specified securities out of the proceeds of an earlier issue of the same kind of shares or specified securities.
Conditions of Buy Back
No company can purchase its own shares or other specified securities unless :-
(a) The buy-back is authorised by the Articles of association of the Company;(b) A special resolution has been passed in the general meeting of the company authorising the buy-back. In the case of a listed company, this approval is required by means of a postal ballot. Also, the shares for buy back should be free from lock in period/non transferability.The buy back can be made by a Board resolution If the quantity of buyback is or less than ten percent of the paid up capital and free reserves;(c) The buy-back is of less than twenty-five per cent of the total paid-up capital and fee reserves of the company and that the buy-back of equity shares in any financial year shall not exceed twenty-five per cent of its total paid-up equity capital in that financial year;(d) The ratio of the debt owed by the company is not more than twice the capital and its free reserves after such buy-back; (e) There has been no default in any of the following
i. in repayment of deposit or interest payable thereon,
ii. redemption of debentures, or preference shares or
iii. payment of dividend, if declared, to all shareholders within the stipulated time of 30 days from the date of declaration of dividend or
iv. repayment of any term loan or interest payable thereon to any financial institution or bank;
(f) There has been no default in complying with the provisions of filing of Annual Return, Payment of Dividend, and form and contents of Annual Accounts;
(g) All the shares or other specified securities for buy-back are fully paid-up;
(h) The buy-back of the shares or other specified securities listed on any recognised stock exchange shall be in accordance with the regulations made by the Securities and Exchange Board of India in this behalf; and
(i) The buy-back in respect of shares or other specified securities of private and closely held companies is in accordance with the guidelines as may be prescribed.
Disclosures in the explanatory statement
The notice of the meeting at which special resolution is proposed to be passed shall be accompanied by an explanatory statement stating -
(a) a full and complete disclosure of all material facts;
(b) the necessity for the buy-back;
(c) the class of security intended to be purchased under the buy-back;
(d) the amount to be invested under the buy-back; and
(e) the time-limit for completion of buy-back
Every buy-back must be completed within twelve months from the date of passing the special resolution.
Sources from where the shares will be purchased 
The securities can be bought back from
(a) existing security-holders on a proportionate basis;
Buyback of shares may be made by a tender offer through a letter of offer from the holders of shares of the company or
(b) the open market through
(i). book building process;
(ii) stock exchanges or
(c) odd lots, that is to say, where the lot of securities of a public company, whose shares are listed on a recognized stock exchange, is smaller than such marketable lot, as may be specified by the stock exchange; or
(d) purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.
Filing of Declaration of solvency
After the passing of resolution but before making buy-back, file with the Registrar and the Securities and Exchange Board of India a declaration of solvency in form 4A. The declaration must be verified by an affidavit to the effect that the Board has made a full inquiry into the affairs of the company as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year of the date of declaration adopted by the Board, and signed by at least two directors of the company, one of whom shall be the managing director, if any:
No declaration of solvency shall be filed with the Securities and Exchange Board of India by a company whose shares are not listed on any recognized stock exchange.
Register of securities bought back
After completion of buyback, a company shall maintain a register of the securities/shares so bought and enter therein the following particulars
a. the consideration paid for the securities bought-back,
b. the date of cancellation of securities,
c. the date of extinguishing and physically destroying of securities and
d. such other particulars as may be prescribed
Where a company buys-back its own securities, it shall extinguish and physically destroy the securities so bought-back within seven days of the last date of completion of buy-back.
Issue of further shares after Buy back
Every buy-back shall be completed within twelve months from the date of passing the special resolution or Board resolution as the case may be.
A company which has bought back any security cannot make any issue of the same kind of securities in any manner whether by way of public issue, rights issue up to six months from the date of completion of buy back.
Filing of return with the Regulator
A Company shall, after the completion of the buy-back file with the Registrar and the Securities and Exchange Board of India, a return in form 4 C containing such particulars relating to the buy-back within thirty days of such completion.
No return shall be filed with the Securities and Exchange Board of India by an unlisted company.
Prohibition of Buy Back
A company shall not directly or indirectly purchase its own shares or other specified securities -
(a) through any subsidiary company including its own subsidiary companies; or
(b) through any investment company or group of investment companies; or
Procedure for buy back
a. Where a company proposes to buy back its shares, it shall, after passing of the special/Board resolution make a public announcement at least one English National Daily, one Hindi National daily and Regional Language Daily at the place where the registered office of the company is situated.
b. The public announcement shall specify a date, which shall be "specified date" for the purpose of determining the names of shareholders to whom the letter of offer has to be sent.
c. A public notice shall be given containing disclosures as specified in Schedule I of the SEBI regulations.
d. A draft letter of offer shall be filed with SEBI through a merchant Banker. The letter of offer shall then be dispatched to the members of the company.
e. A copy of the Board resolution authorising the buy back shall be filed with the SEBI and stock exchanges.
f. The date of opening of the offer shall not be earlier than seven days or later than 30 days after the specified date
g. The buy back offer shall remain open for a period of not less than 15 days and not more than 30 days.
h. A company opting for buy back through the public offer or tender offer shall open an escrow Account.

Here are the pros and cons of share buybacks:

• Pro: Since no money is sent to you, you are not taxed.

• Pro/con: The share repurchase reduces the number of shares circulating, thus increasing the value of the remaining shares. However, to realize this increased value, the market must reprice the remaining shares upwards. The passage of something of value to you is only theoretical unless and until this happens.

• Con: No money is sent to you. If you want the money represented by the increased value, you must sell some of your shares. The money you receive from the sale is then taxed at either the long-term or short-term capital gains rate (assuming that the sale is at a higher price than you originally paid for the shares). The federal long-term rate is 15%, the same as with dividends. The short-term rate is your marginal tax rate, which is probably higher.

• Con: Share repurchase programs are ''one-offs,'' not regular programs at most corporations. They are not predictable as to size or frequency.

• Con: Share repurchase programs are not monitored closely. Many of them are never completed after their initial announcement. Such failures are inconsistently reported in the financial press.

• Con: Many companies repurchase shares in order to pay off their executives (and other employees) on stock option grants. The executives turn around and sell the shares immediately, because they are part of their compensation package. Thus, the shares are not taken out of circulation at all, and other shares do not gain increased value as a larger piece of the pie. Share buybacks do not return ''something of value'' to the shareholders at all, but they are rather a compensation expense to the company. The executives, not the owners, are getting the money.

• Con: Often, share repurchase programs are announced when the stock's price is highest. That is because the program might be implemented in response to a burst in profits, which drove the share price higher in the market. It might also be because the company needs the shares now to pay off options which are being exercised-the timing of which the company cannot control.

IPO

Initial public offering (IPO)

Definition

The first offering of a company's shares to the public known in the UK as a flotation. IPO was originally an American term but is increasingly being used across all world markets The shares offered may be existing ones held privately, or the company may issue new shares to offer to the public.

There can be lots of reasons why companies offer shares to the public:

§  the directors want to raise new capital for the company

§  the directors want to widen the shareholder base of the company

§  the shareholders want to have a liquid market in which to trade their shares

§  the directors want to be able to use 'paper' to make acquisitions

§  the directors want the publicity that a public listing brings

In recent years there has been a tendency for companies to list on the market by a private placing of shares to institutions rather than public offerings. This is partly because the costs of a placing are far lower than an offer for sale, and partly it is because in 1996 the Stock Exchange scrapped its rule requiring that new issues worth more than £50m should offer a proportion to the public.

Whatever the reason, it rankles that members of the public are so often denied the chance to 'get in on the ground floor' while institutions clean up. The internet may reverse the trend, however. There have already been several online flotations in the USA and Europe in which private investors get full participation rights. These are sometimes referred to as EPOs (Electronic Public Offerings).

One of the advantages of buying shares in IPOs is that they do not attract Stamp Duty (0.5% tax normally paid on share purchases) and since you can buy direct from the issuing company you can avoid broker's commission.

Initial public offering

From Wikipedia, the free encyclopedia.

In financial markets, an initial public offering (IPO) is the first sale of a company's common shares to public investors. The company will usually issue only primary shares, but may also sell secondary shares. Typically, a company will hire an investment banker to underwrite the offering and a corporate lawyer to assist in the drafting of the prospectus.

The sale of stock is overseen by financial regulators and where relevant by a stock exchange. It is usually a requirement that disclosure of the financial situation and prospects of a company be made to prospective investors.

In the United States, the U.S. Securities and Exchange Commission (SEC) regulates the securities markets and, by extension, enforces the legal procedures governing IPOs. The law governing IPOs in the United States includes primarily the Securities Act of 1933, the regulations issued by the SEC, and the various state "Blue Sky Laws".

Initial Public Offering - IPO
	The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded. In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), best offering price and time to bring it to market. Also referred to as a "public offering".
	IPOs can be a risky investment. For the individual investor it is tough to predict what the stock will do on its initial day of trading and in the near future since there is often little historical data to analyze the company with. Also, most IPOs are of companies going through a transitory growth period and are therefore subject to additional uncertainty regarding their future value.

Initial Public Offerings (IPO)

IPO stands for initial public offering and occurs when a company first sells its shares to the public. You can find more information about IPOs, particularly why investors have difficulty getting shares in an IPO, the pricing differences between the IPO and secondary market trading, and a brokerage firm’s IPO eligibility requirements.

IPO Basics: What is an IPO?


Selling Stock
IPO is an acronym for Initial Public Offering. This is the first sale of stock by a company to the public. A company can raise money by issuing either debt (bonds) or equity. If the company has never issued equity to the public, it's known as an IPO.

Companies fall into two broad categories: private and public.

A privately held company has fewer shareholders and its owners don't have to disclose much information about the company. Anybody can go out and incorporate a company: just put in some money, file the right legal documents, and follow the reporting rules of your jurisdiction. Most small businesses are privately held. But large companies can be private too. Did you know that IKEA, Domino's Pizza, and Hallmark Cards are all privately held?

It usually isn't possible to buy shares in a private company. You can approach the owners about investing, but they're not obligated to sell you anything. Public companies, on the other hand, have sold at least a portion of themselves to the public and trade on a stock exchange. This is why doing an IPO is also referred to as "going public."

Public companies have thousands of shareholders and are subject to strict rules and regulations. They must have a board of directors and they must report financial information every quarter. In the United States, public companies report to the SEC. In other countries, public companies are overseen by governing bodies similar to the SEC. From an investor's standpoint, the most exciting thing about a public company is that the stock is traded in the open market, like any other commodity. If you have the cash, you can invest. The CEO could hate your guts, but there's nothing he or she could do to stop you from buying stock.

Why Go Public?
Going public raises cash, and usually a lot of it. Being publicly traded also opens many financial doors:

• Because of the increased scrutiny, public companies can usually get better rates when they issue debt.
• As long as there is market demand, a public company can always issue more stock. Thus, mergers and acquisitions are easier to do because stock can be issued as part of the deal.
• Trading in the open markets means liquidity. This makes it possible to implement things like employee stock ownership plans, which help to attract top talent.

Being on a major stock exchange carries a considerable amount of prestige. In the past, only private companies with strong fundamentals could qualify for an IPO and it wasn't easy to get listed.

The Internet boom changed all this. Firms no longer needed strong financials and a solid history to go public. Instead, IPOs were done by smaller startups seeking to expand their business. There's nothing wrong with wanting to expand, but most of these firms had never made a profit and didn't plan on being profitable any time soon. Founded on venture capital funding, they spent like Texans trying to generate enough excitement to make it to the market before burning through all their cash. In cases like this, companies might be suspected of doing an IPO just to make the founders rich. In VC talk, this is known as an exit strategy, implying that there's no desire to stick around and create value for shareholders. The IPO then becomes the end of the road rather than the beginning.

How can this happen? Remember: an IPO is just selling stock. It's all about the sales job. If you can convince people to buy stock in your company, you can raise a lot of money. In our opinion, IPOs like this are extremely risky and should be avoided.

IPO Basics: Tracking Stocks

Tracking stocks appear when a large company spins off one of its divisions into a separate entity. The rationale behind the creation of tracking stocks is that individual divisions of a company will be worth more separately than as part of the company as a whole.

From the company's perspective, there are many advantages to issuing a tracking stock. The company gets to retain control over the subsidiary but all revenues and expenses of the division are separated from the parent company's financial statements and attributed to the tracking stock. This is often done to separate a high growth division with large losses from the financial statements of the parent company. Most importantly, if the tracking stock rockets up, the parent company can make acquisitions with stock of the subsidiary instead of cash.

While a tracking stock may be spun off in an IPO, it's not the same as the IPO of a private company going public. This is because tracking stock usually has no voting rights, and often there is no separate board of directors looking after the rights of the tracking stock. It's like you're a second class shareholder! This doesn't mean that a tracking stock can't be a good investment. Just keep in mind that a tracking stock isn't a normal IPO.

IPO Basics: Conclusion and Resources

Let's review the basics of an IPO:

• An IPO is the first sale of stock by a company to the public.
• Broadly speaking, companies are either private or public. Going public means a company is switching from private ownership to public ownership.
• Going public raises cash and provides many benefits for a company.
• The dot-com boom lowered the bar for companies to do an IPO. Many startups went public without any profits and little more than a business plan.
• Getting in on a hot IPO is very difficult, if not impossible.
• The process of underwriting involves raising money from investors by issuing new securities.
• Companies hire investment banks to underwrite an IPO.
• The road to an IPO consists mainly of putting together the formal documents for the SEC and selling the issue to institutional clients.
• The only way for you to get shares in an IPO is to have a frequently traded account with one of the investment banks in the underwriting syndicate.
• An IPO company is difficult to analyze since there isn't a lot of historical info.
• Lockup periods prevent insiders from selling their shares for a certain period of time. The end of the lockup period can put strong downward pressure on a stock.
• Flipping may get you blacklisted from future offerings.
• Road shows and red herrings are marketing events meant to get as much attention as possible. Don't get sucked in by the hype.
• A tracking stock is created when a company spins off one of its divisions into a separate entity through an IPO.
• Don't consider tracking stocks to be the same as a normal IPO, as you are essentially a second-class shareholder