Initial public offering (IPO) is the process by which private corporations offer shares to the public in a new stock issuance. So basically, it’s the process by which private corporations can raise capital from public investors. And after the initial share sale, the corporation is no longer privately held. If you are looking to participate in upcoming IPOs, it’s important for you to be well versed with the terms associated with the process. Have a look at the common IPO terms – This is also known as primary market offerings.
Abridged prospectus is basically a memorandum that contains all salient features of the prospectus as specified by SEBI (The Securities and Exchange Board of India). Which means if you are thinking of investing in an IPO, this memorandum will provide you all the information in brief, helping you make a calculated decision. A company cannot issue an IPO application form for the purchase of securities unless an abridged prospectus accompanies such a form.
Red Herring Prospectus
Besides Abridged Prospectus, you need to be familiar with another kind of Prospectus – Red Herring prospectus. This is another name for the preliminary prospectus and this is the (mandatory) offering document that is printed by the issuer containing a business description, objective of the business, discussion of strategy, presentation of historical financial statements of the company, explanation of recent financial results, management and their backgrounds, and ownership.
Book Running Lead Manager
Book Running Lead Manager plays a very important role in an IPO’s process. They draft and design the Offer documents, prospectus, statutory advertisements and memorandum containing salient features of the prospectus. They also make the various marketing strategies for the issue. The post issue activities of Book Running Lead Manager include coordinated non-institutional allocation, intimation of allocation and dispatch of refunds to bidders, management of escrow accounts etc.
The process of deciding the issue price for an IPO based on the prices bid by investors is called book building. By this process the company assesses the demand of the share. Hence, the issue price will be closer to the upper end of the price band if investors have shown strong interest in the IPO and bid high. Otherwise, it will be closer to the lower end of the band. For instance, if the price band for an IPO is Rs.10-20 per share, the issue price would be set closer to Rs. 20 if investors have bid high. In case of low bid, the issue price would be set closer to Rs. 10.
Anchor investor as a category was launched by The Securities Exchange Board of India (SEBI) in the year 2009. Anchor investors comprise institutional investors (commercial banks, public financial institutions, mutual funds, foreign portfolio investors, etc.) who are invited to subscribe the shares before the Initial Public Offers (IPOs) open up. Each anchor investor invests a minimum of Rs 10 crore in an IPO.
Anchor investor gets a confirmed allotment of shares and the issuer(IPO Company) also gets confirmed subscription and helps in market making. Anchor investors shares are locked in for a year from listing date.
Non-Institutional Investor (NII)
This is yet another category through which an investor can apply for shares in an IPO. The non-institutional investor comprises High Net worth (HNI) investors. The non-institutional investor can bid for more than 2 lakh rupees. Also, a minimum of 15% of the IPO is reserved for the non-institutional investor.
Retail Individual Investor (RII)
The retail individual investor comprises investors like resident Indian individuals, non-resident Indians (NRIs), and Hindu Undivided Families (HUFs). The retail individual investors are permitted to invest a maximum of Rs.2 lakh in an IPO. Furthermore, they can bid at the cut-off price. Also, 35% of shares of the total issue size in a book building IPO is reserved for RIIs.
The minimum price per share that applicants can bid when applying for an IPO is called the Floor Price. In case of IPOs with a price band, this becomes the lower limit of the price band.
A cut-off price is the offer price, finalised by a company in consultation with the book running lead managers. The issuer determines this price based on the demand for the shares and the price that most people are willing to pay for them and this is generally reserved for retail investors.
A Bid Lot is the predetermined number of shares which have to be applied for by an investor. It varies from one issue to the other. There is a minimum lot size which is pre-decided by the company and mentioned in the application form. For instance, for a company if the minimum bid lot in IPO is 10 and in multiples of 10 with a Price Band 100-120. It means that a retail investor cannot apply for less than 10 shares in that particular issue. The application for more than 10 shares has to be in multiples of 10 like 20, 30, 40, and so on.
ASBA (Applications Supported by Blocked Amount) is one of the most common terms associated with IPO. It’s a process developed by The Securities Exchange Board of India (SEBI) for easing in applying to IPOs. In ASBA, an IPO applicant’s bank account doesn’t get debited until shares are allotted to the applicant. With ASBA, the money remains in the investor’s account but is blocked until shares are allocated/rejected. Post the allotment of the shares, the exact amount is debited and the balance is unblocked. This makes the IPO application process simpler and faster.
Basis of Allocation or Basis of Allotment
Basis of Allocation or Basis of Allotment is a document published by registrar of an IPO to stock exchanges and IPO investors. This document provides important information such as the final price fixed for an IPO, issue subscription (bidding) information or demand of an IPO and share allocation ratio. The IPO allotment information is categorized by the number of shares applied by an applicant. For each such category, detailed bidding information is provided in this document. From the number of valid applications received to the total number of shares applied, From the ratio of the allotment to the number of shares allocated to the applicants – it includes every detail.
This is the date on which IPO shares start trading on the stock exchange. One important thing to note here is that the BRLM or Lead Manager has to ensure that the stocks are credited to the Demat accounts of all applicants who have been allotted shares, before the listing date. Hence, investors can start trading in these shares on the listing day itself.
Qualified Institutional Buyer (QIB)
Qualified Institutional Buyer primarily comprises of –
A mutual fund, venture capital fund and foreign venture capital investor registered with the Board
A foreign institutional investor and sub-account, registered with the Board
A public financial institution as defined in Section 4A of the Companies Act, 1956
A scheduled commercial bank
A multilateral and bilateral development financial institution
A state industrial development corporation
An insurance company registered with the Insurance Regulatory and Development Authority
A provident fund with minimum corpus of twenty-five crore rupees
A pension fund with minimum corpus of twenty-five crore rupees and others
QIBs are not allowed to bid at the cut-off price or withdraw the bid after the close of the IPO. Also, nearly 50% of shares of the total issue size in a book building IPO is reserved for QIBs.
Master these terms and get started with an IPO!