Important Terms to Know Before Investing in an IPO
Investing in an Initial Public Offering (IPO) can be a great way to promote a company by making it public in the investment market. Companies requiring capital can raise funds with the help of an IPO by listing new shares to the public. If an IPO launch is successful, it can earn substantial returns within a short period. However, before starting your investment journey, it is vital to learn all about IPO terminologies to make the process seamless.
What Is an IPO?
IPO or Initial Public Offering is a simple process by which a private company can go public by listing and selling its stocks in the market. It is the first sale of shares by a company to the public, institutional investors, and HNIs, especially when a company decides to offer its shares. An IPO market is where a company looks for accessing long-term capital.
Moreover, for listing on the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE), a company needs to have a minimum paid-up capital of ₹10 crore. Besides, the post-issue market capitalization of stock should not be below ₹25 crore.
What Are the Key Terms Related to an IPO?
Key terms related to IPO are as follows:
Application Supported by Blocked Amount (ASBA)
A procedure established by the Securities and Exchange Board of India (SEBI) ensures that it will only take out funds from an investor’s account once shares get allotted. Earlier, investors needed to pay money to the company during the application itself. Application Supported by Blocked Amount (ASBA) ensures that money is blocked in every investor’s bank account, and after the allotment of shares, the designated amount gets debited.
Abridged Prospectus is a memorandum comprising prominent aspects of a prospectus prescribed by the Securities and Exchange Board of India (SEBI). It is a summary of the main IPO prospectus containing all salient features of the IPO issue. According to Indian Companies Act, 1961, it is mandatory for companies filing for IPO to attach an abridged prospectus with the application form.
Red Herring Prospectus (RHP)
RHP is an offer document or a final prospectus that a company files before launching an IPO. It contains information about the company and IPO that investors need, like business description, management credentials, future strategy, operational data, price band, and many more.
Anchor investors are institutions allotted with shares at a fixed price before the IPO opens to the public. They make a bid under an IPO for a minimum of ₹10 crores worth of shares subject to a 30-day lock-in period. It is a sub-category under qualified institutional buyers, and it is allocated for Anchor shares to own 60% of the shares in this category.
The price band is the price range an investor can bid for a company’s shares. For example, if the price band of a share is between ₹200 to ₹300, you cannot bid below ₹200 or above ₹300.
Book Building Process
There are two ways through which companies fix the price of IPO, one is fixed price, and another is book-building price. In the book-building method, a company analyses its bids and decides its issue price after the bidding process.
Basis of Allotment or Allocation
Basis of Allotment is a document published by the registrar of an IPO after finalising the share allocation based on regulatory guidelines. It holds information about the final fixed price of an IPO, subscription information, share allocation ratio, IPO demand and many more.
The Issue Price, also known as offer price is the price at which the shares of a newly allotted company are first sold. Here the book-building IPO issue has been closed, and the share prices are now officially available for application. Moreover, this price differs across the investor class and is the lowest among retail investors.
The minimum price an investor can bid while applying for an IPO is called the floor price. For IPOs, the floor price is the lower limit of the price band that follows the book-building method.
It is the price at which the allocation of shares to investors is at the lowest level, and it is often only available to retail investors. If the investors bid a higher price than the cut-off price, then the balance is refunded to you.
The offer date is the opening date of the IPO or the first date when investors can apply for shares in an IPO.
The shares are listed on the stock exchange when the IPO closes. This date on which the stock exchange starts trading IPO shares is called the listing date.
Over subscription is when a company receives more applications than the shares offered in the IPO issue. This situation arises when the applicant bids for more shares than a company offers.
Under subscription is when a company receives fewer applications than the shares offered in the IPO issue. This situation arises when the applicant bids for fewer shares than a company offers.
Minimum subscription is the minimum number or percentage of subscriptions retail investors need for an IPO to go through. Currently, the minimum subscription is 90%.
Underwriters are investment banks that work alongside a company to manage IPO operations like determining its offer price, marketing IPO, and many more. Moreover, they charge an underwriting fee for their services.
A bid lot or lot is the minimum number of shares predetermined by a company that investors will apply to an IPO. Here, investors can apply for multiple lots as well. Moreover, a corporation predetermines the size of these bid lots and the number of shares they include.
The application process of an IPO has become quite easy nowadays, despite the numerous formalities you need to take care of. However, this might get difficult if you are a novice unaware of all the basic IPO terminologies required while investing. Hence, it is important to gain complete knowledge on IPO and its important terms before making an investment.
Frequently Asked Questions (FAQs)
What is the difference between IPO and shares?
IPO is the process of selling shares of a privately held company for the first time to the public. Hence, shares are the actual measures of investments, whereas IPO results in investors getting the company’s shares.
Is it necessary to invest in an IPO?
IPO can be an ideal way of investment, especially for newcomers who are in the verse of exploring the market. The necessity factor of investing in an IPO basically depends on the individual and their risk bearing capability. However, if an IPO launch turns out to be successful, you can earn heavy returns easily.
Is it mandatory to have a PAN number while applying for an IPO?
Yes, it is mandatory to have a PAN number while applying for an IPO. Moreover, the investor should cross-check their PAN details while applying for an IPO, as any error will lead to the cancellation of the application.
For how many days does an IPO remain open for the public?
According to clause 8.8.1, the subscription list for public issuing of IPO remains open for at least 3 working days. In case of a book-building issue, it remains open for 3 to 7 days, whereas during a change in the price band this time can extend by three days. Moreover, a public issue by an infrastructure company, satisfying Clause 2.4.1(iii) of Chapter II is open for a maximum of 21 working days.