Conflict of Interest in Investment Banking
February 12, 2025
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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.
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.
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.
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