In 2021, investors seemed really interested in investing in IPOs. IPO or Initial Public Offering is when a private company offers its shares to public investors. Plan on participating in upcoming IPOs? Then it is essential to know what specific terms associated with IPO mean. In this article, we will discuss some frequently used IPO jargon.
Key Terms Related to IPO
Earlier, investors had to pay the company at the time of application. If the number of shares allotted was less than the asked bid, the company would refund the money, which was time-consuming. SEBI drafted ASBA or Application Supported by Blocked Amount as a solution to safeguard the interests of investors.
ASBA ensures that the money remains in a blocked state in the investor's account. After the shares are allocated, the designated amount is debited based on the number of shares, and the remaining money is unblocked. This makes the process of payment simpler and faster.
Abridged Prospectus is the summary of the IPO prospectus, which contains all the salient features of the main prospectus. According to the Companies Act, 1961, the abridged version must accompany all IPO prospectus. So, if you are thinking about investing in IPO, this is the first document you need to look at.
Red Herring Prospectus
DRHP is the draft prospectus filed by a company to SEBI at least 21 days before the IPO. SEBI reviews the prospectus in this duration and makes suggestions. RHP or Red Herring Prospectus is the final prospectus or the offer document, which the company files before the IPO. It contains all the information about the company and the IPO that investors need, like its objectives, management credentials, company's description, future strategy, operational data, price band, IPO calendar, etc.
The price band is the price range within which you can bid for the company's shares. For example, if the price band is 500-550, you cannot bid below 500 or above 550. The company and the underwriter decide the price range for different investor classes like high-net-worth individuals, retail investors, and qualified institutional buyers.
Book Building Process
Investors bid for the company's shares according to the price band. Once the bidding process is over, the company analyses the bids and decides the issue price. If the investors show demand and bid high, then the issue price is closer to the higher end of the price band, and if they bid low, then the issue price is towards the lower bracket of the price band. This process is called book-building.
The price at which the company allocates its shares to the investors is called the issue price. The issue price is different across the investor classes; it is the lowest for the retail investors.
The floor price is the minimum price an investor can bid on while applying for an IPO. For IPOs that follow the book building method, the floor price is the lower limit of the price band.
The lowest issue price at which shares are allotted in an IPO is the cut-off price. It is usually reserved for retail investors. If you bid at a higher rate than the cut-off price while applying, the extra money is not debited from your account, as per ASBA.
The first date when investors can apply for shares in an IPO is called the offer date or the opening date of the IPO.
Once the IPO closes and the shares are allotted, the stakes are listed on the stock exchange. The date on which the IPO shares start trading on the stock exchange is the listing date. Therefore, it is crucial to ensure that the shares are transferred to the Demat accounts of all the investors who were allocated shares before the listing date to start trading them on the listing date itself.
An IPO is said to be oversubscribed if the applicants bid for more shares than the company offers. This excess amount received by the company owing to an oversubscribed IPO is called oversubscription.
A minimum number of subscriptions is needed from retail investors for an IPO to go through. This minimum percentage is called a minimum subscription. The minimum subscription at present is 90%. If this threshold as prescribed by SEBI is not met, the entire subscription amount has to be refunded by the company.
An investment bank works alongside the company to manage the operations of an IPO, like determining the offer price, marketing the IPO, and issuing the shares to investors. These investment banks are called underwriters. They charge an underwriting fee for their services.
The minimum number of shares an investor needs to bid for in an IPO is the Bid Lot. If the investor wants more shares, he will have to bid in multiples of the bid lot. For example, if the bid lot for an IPO is 1000, you can either bid for 1000 or multiples such as 2000, 3000, etc.
Applying for an IPO may seem a very daunting process, especially given the numerous formalities that have to be taken care of before applying. The very unfamiliar IPO lexicon further worsens this complication. This blog should serve as a comprehensive guide if you are starting on your IPO investment journey but are confused about the technical terms. Happy Investing!