What is an IPO?
An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance.
In other words, IPO is the selling of securities to the public in the primary market.
Public share issuance allows a company to raise capital from public investors.
Meanwhile, it also allows public investors to participate in the offering.
While investing in an IPO, one should be fully aware of the ‘Key Terms’ involved.
We have decoded some Key Terms for you –
#1 – Draft Red Herring Prospectus (DRHP)
The draft prospectus submitted by the company to Securities Exchange Board of India (SEBI) at least 21 days before the IPO.
SEBI reviews the prospectus and requests changes during these 21 days. The general public can also submit their comments to SEBI during this period.
#2 – Red Herring Prospectus
The final prospectus filed by the company with the Registrar of Companies (ROC) before launching the IPO.
It contains all the information that investors need about the company and the IPO, including the company’s business description, management credentials, operating details, future strategy, IPO price band, the intended use of the proceeds, and the IPO calendar.
The prospectus is also known as the offer document.
#3 – Price Band
The price range within which investors can bid for IPO shares.
It is set jointly by the company and the underwriter and is different for each investor category, viz. qualified institutional buyers (QIBs), retail investors, and high net-worth individuals (HNIs).
It is generally the lowest for retail investors (i.e. private individuals). If the price band has been fixed at Rs.100-110 per share, you cannot bid below Rs.100 or above Rs. 110.
#4 – Book Building Process
The process of deciding the issue price for an IPO based on the prices bid by investors.
The term 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 example, if the price band for an IPO is Rs. 100-110 per share, the issue price would be set closer to Rs. 110 if investors have bid high.
If investors have bid low, the issue price would be set closer to Rs. 100.
#5 – Offer Date
This is the first date when you can apply for shares in an IPO.
It is also known as the opening date of an IPO.
#6 – Lot size
The minimum number of shares you can bid for in an IPO.
If you want to bid for more shares, it has to be in multiples of the lots size.
For example, if the lot size for an IPO is 1500 shares, you have to bid for at least these many.
If you want to bid for more, it should be in multiples of 1500, such as 3000 and 4,500.
#7 – Minimum Subscription
This is the minimum percentage of IPO shares that retail investors need to subscribe to for an IPO to go through.
At present, the minimum subscription is 90%.
The company has to refund the entire subscription amount if this 90% threshold is not met.
#8 – Floor Price
The minimum price per share that you can bid when applying for an IPO is called the Floor Price.
In case of IPOs with a price band, this is the lower limit of the price band.
#9 – Issue Price
The price at which shares are allotted to investors once the book building process is over.
The issue price is different for each investor category and is generally the lowest for retail investors.
It is also called offer price at times.
#10 – Cut-off Price
This is the lowest issue price at which shares are allotted in an IPO.
It is generally reserved for retail investors.
If your bidding price is higher than the cut-off price, the difference will be refunded to you.
#11 – Oversubscribed
An IPO is oversubscribed if investors have bid for more shares than offered by the company.
#12 – Oversubscription
The excess subscription amount received by the company in case of an oversubscribed IPO is called oversubscription.
#13 – Listing Date
This key term relates to the date on which IPO shares start trading on the stock exchange.
You can sell the shares you received in the IPO and buy the company’s shares if you don’t receive them in the IPO.
Is it good to buy IPO shares?
IPOs tend to garner a lot of media attention, some of which is deliberately cultivated by the company going public.
Generally speaking, IPOs are popular among investors because they tend to produce volatile price movements on the day of the IPO and shortly thereafter.
This can occasionally produce large gains, although it can also produce large losses.
Ultimately, investors should judge each IPO according to the prospectus of the company going public, as well as their individual financial circumstances, risk tolerance and comprehensive understanding of key terms relating to an IPO!
IPO can appear to be a very complicated process first up.
But that is only because of its many technicalities.
It is quite simple to understand once you are aware of some key IPO terms.
This IPO key terms checklist will help you master the basic concepts and make the most out of IPOs.