There are certain cases where investors wish to invest money in Initial Public Offerings but are not aware of some of the popular terminology of IPO. While IPO terminology may seem complicated to you, it is not if you understand its meaning even once.
Hence today, we’ll talk about some key terms related to IPO and their meanings in a simplified version. Let’s dive in.
Popular key terms related to IPO
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Abridged Prospectus
When a company or startup begins to go public and sell its shares to the public, it has to submit an abridged prospectus along with the application form as said in the Companies Act, 1956. A company must inform its investors of their rights, outcomes and effects of investing in that company. Through an abridged prospectus, investors get to know all the essential information related to the company they are thinking of investing in.
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Draft Red Herring Prospectus
A draft red herring prospectus (DRHP) is a document prepared by a company during an IPO process to explain its mission and vision to its potential investors. The document assists investors in deciding whether to invest in a company. It includes various sections that cover detailed information about the company, such as its performance in the last quarter, its expectations for the future, its current status and the risks associated with investing in the company.
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Bid Lot
Unlike normal trading, where investors can buy several shares at their convenience, a bid lot refers to several shares pre-determined by the company to be applied by investors. It is the minimum number of shares mentioned in the application form.
However, investors can apply in multiple slots too. For example, the minimum bid lot for Z company’s IPO is 10. Now, if a retail investor wishes to buy the shares of Z Ltd, he must apply for at least 10 shares in that issue. If he wishes, he can apply for more shares in the multiples of 10, such as 20, 30, 40, 50, etc.
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Book Building
Two ways through which a startup/company can fix the price of the IPO are the fixed price method or the book-building method.
Under the fixed price method, a company usually fixes its IPO prices prior. However, in the book-building method, the companies do not fix the price of the IPO beforehand. Rather, the companies assess the price of the IPO by looking at the demand for their shares. If the demand is higher than expected, the prices of IPO tend to be higher. Here, if an investor wishes to apply for the shares, he applies wherein he declares the number of shares he wishes to apply for and the price. Once all the applications are received, the company fixes the price. Hence, in the book-building method, the company does not fix the price of the IPO prior but gives its investors a price range.
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Floor Price
As discussed in the book-building method, the companies do not fix the price for the IPO but give a range of prices. The range consists of a minimum price below which the investors’ applications won’t be accepted and a maximum price limit. The lowest price less than which applications of investors are not entertained is known as the floor price of the Initial Public Offering.
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Cut-off Price
In simple words, the cut-off price is the price at which investors get the shares of the company when they apply for the IPO. The cut-off price is determined after consulting the book-running lead managers or BRLMs.
The cut-off price can be any of the two: it can lie within the price range decided by the company or more than the floor price. Usually, the cut-off price is specified for retail investors only and is determined on the basis of the demand for the shares, and the price investors are ready to pay.
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Issue price
The issue price is the price at which the shares are finally allotted to the applicants. It is different from the cut-off price as it is for retail investors only, but the issue price is different for different categories of investors.
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Listing Date
The date on which the company shares are finally listed on the stock exchange for trading purposes in the secondary market after the IPO closes is known as the listing date. Shares of applicants whose applications have been approved shall be credited to their respective Demat accounts before the listing date.
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Non-Institutional Investor(NII)
Various categories of investors are eligible to apply for the shares in the initial offering of a company. One of them is non-institutional investors. These include:
- Indian individuals
- NRIs
- Hindu Undivided Families
- Companies
- Corporate Bodies
- Trusts
- Science institutions
- Societies
If an investor wishes to invest more than Rs.2 lakh, then the person will fall under the NII category.
These investors are not allowed to bid at the cut-off prices but can cancel their bids until the process of allotment is done. Under this category, a minimum of 15% is reserved for retail investors.
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Retail Individual Investors
This category of investors includes Indian individuals (residents), NRIs, and Hindu Undivided Families. Unlike NIIs, retail investors can not invest more than Rs 2 lakh in an IPO but can bid at the cut-off price. They can cancel their bids until the process of allotment is done and have a 35% share in the IPO dedicated to them.
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Qualified Institutional Buyers
This category of investors includes mutual fund companies, foreign portfolio investors, banks, etc. QIBs are not allowed to cancel their bid until allotment or submit their proposal at the cut-off price. Generally, IPOs’ 50% share is dedicated to them.
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Anchor Investor
As we talked about the QIBs category, there is a subcategory of them which is known as anchor investors who can apply for shares worth equal to or more than Rs.10 crores in an IPO. 60% of shares are dedicated to anchor investors under the QIBs category.
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Oversubscribed and Undersubscribed
It is not possible to say that a company receives the exact number of applications it offers. Many times, more applications are received than the number of shares offered, which is what we call oversubscription. Alternatively, if a company receives fewer applications than the number of shares it offers, it is known as under subscription.
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Application Supported by Blocked Amount (ASBA)
Earlier, investors used to make payments for the shares they applied for IPO during the application period. If there were any excess payments, the money would get refunded, but it would take a long time.
Now, as per SEBI, with ASBA, the investor’s money in their accounts is blocked until the allotment is done. Post the allotment, the required amount is deducted, and the investors withdraw the rest amount.