What are the Popular Terminologies of IPO?

If you’re thinking of participating in an Initial Public Offering (IPO), certain terms are important to understand. These key IPO terms include DRHP, book-building issue, fixed price issue, OFS, fresh issue, allotment, subscription and more.

Understanding key terms related to IPO helps investors evaluate the IPO pricing, business, and objectives.

What is an IPO?

An IPO is a process through which a private company offers its shares to the public and gets listed on the stock exchange. After the IPO, the company's shares are publicly traded, and investors can buy and sell them on the stock exchange.

The IPO process begins when a company files a Draft Red Herring Prospectus (DRHP) with SEBI. This document consists of all important information related to the IPO and the business.

SEBI review the documents; if everything is good, it provides approval to proceed with the IPO process.

Also Read: How to Apply for an IPO Online?

Key IPO Terms

Here is a list of key IPO terms that investors should know while applying to an IPO:

Draft Red Herring Prospectus (DRHP)

DRHP is a preliminary document a company submits before launching an IPO. It includes information about the company, its business, financial performance, risks, management, and the proposed issue.

The DRHP helps investors understand the company and the proposed public issue before the company files the final offer document.

Red Herring Prospectus (RHP)

An RHP is an offer document that contains important information about the company and the IPO. It generally includes details about the business, financial statements, risks, promoters, objects of the issue and issue structure. The RHP helps investors conduct due diligence before applying for an IPO.

##Book-Building Issue vs Fresh Issue

In a book-building issue, investors bid within a specified price band, and investor demand determines the final issue price.

In a fixed-price issue, the company sets the price at which it offers shares, and investors apply at the predetermined price.

Price Band

Price band refers to the minimum and maximum price at which investors can bid for shares in a book-built IPO. For example, if the price band is ₹107 to ₹110, investors can place bids within this range. The final issue price is determined after considering investor demand during the bidding process.

Book Running Lead Manager

The book running lead manager is a merchant banker appointed to manage and coordinate IPO-related activities. It assists with due diligence, issue structuring, regulatory compliance, marketing and coordination with various parties.

Application Supported Blocked Amount (ASBA)

ASBA is an IPO application facility through which the application amount remains blocked in the investor’s bank account until the allotment process is completed. If shares are allotted, the required amount is debited. If shares are not allotted, the blocked amount is released according to the applicable process.

Oversubscription and Undersubscription

An IPO is considered oversubscribed when the number of applications exceeds the shares available for allotment. In contrast, the IPO is undersubscribed when the number of applications received is less than the shares available for allotment.

Fresh Issue vs OFS

In a fresh issue, the company receives the money raised from the public and may use it for business expansion, debt repayment, innovation and future growth. In an offer-for-sale the proceeds go directly to the existing shareholders rather than the company.

Objectives of the Issue

Objectives of the issue refer to the purposes for which funds raised through a fresh issue are intended to be used. These may include capital expenditure, debt repayment, working capital requirements, acquisitions, or general corporate purposes. Investors can find these details in the company’s offer documents.

Cut-off Price

Cut-off price is the final price determined for a book-built IPO after considering bids received from investors. Retail investors who select the cut-off option agree to purchase shares at the final issue price.

IPO Opening and Closing Date

IPO opening date is the day when subscription begins for pubic investors and closing is the day when subscription closes. Usually, IPOs are open for 3 business days.

Allotment

Allotment refers to the process of assigning IPO shares to investors after the subscription period ends. When an IPO is oversubscribed, investors may receive fewer shares than they applied for or none at all. The allotment process follows applicable rules for different investor categories.

Listing Date

Listing date is the date, when shares were listed on the stock exchange and available for trading. After listing, shares can be bought and sold during the market hours.

Types of Investors

Different investor categories participate in an IPO. The classification determines each category's share allocation and the applicable subscription rules.

• Qualified Institutional Buyers (QIB)
• Non-Institutional Investors (NII)
• Retail Investors

FAQs

Is the red herring prospectus the same as the draft red herring prospectus?

No, the red herring prospectus (RHP) is the final version submitted before the IPO. In contrast, the draft red herring prospectus (DRHP) is the initial draft submitted to SEBI for regulatory approval. In contrast, the draft red herring prospectus (DRHP) is the initial draft submitted to SEBI for regulatory approval.

What is the difference between an OFS and a fresh issue?

In an OFS, the IPO proceeds go to the selling shareholders, while in a fresh issue, the proceeds are used for business expansion, debt repayment, and future growth.

What is ASBA?

Application supported by the blocked amount (ASBA) is a method of applying to an IPO in which the application amount is not immediately debited but blocked. When you get the allotment, the amount is debited; otherwise, it gets unblocked.

Who are Anchor Investors in IPO?

Anchor investors are a sub-category of qualified institutional buyers that invest in an IPO one day before its public offering.