20 things to know before investing in a company’s IPO
A term that has dominated pink newspapers, business news channels and financial portals for the past couple of years or so, is IPO (initial public offering).
Many startups and companies have caught IPO fever, some like Zomato, Paytm, Nykaa, etc. are already public, and some like LIC, Swiggy, Flipkart, Oyo, etc. plan to go public soon.
All of this created a lot of hype around IPOs and made them the talk of the town in the financial world. And amid this hype, people are often gripped by FOMO (fear of missing out).
But before you get too excited to jump on the IPO bandwagon and invest your hard-earned cash, isn’t it important to understand some essential IPO-related terms?
So here is a list of 20 must-have IPO terms that you need to understand before diving into it.
1. Price range
This is the price range within which investors can bid for IPO shares.
For example, if the company offers its shares in the range of ₹100-110 per share, this is the price range for the share price set for the IPO. The price range is set jointly by the company and the underwriter and is different for each category of investors, such as. Qualified Institutional Buyers (QIB), Retail Investors and High Net Worth Individuals (HNI).
2. Book creation process
Book building is the process by which an underwriter tries to determine the price of the stock to offer in the IPO. The underwriter determines the price by inviting investors to submit bids for the number of shares and the price(s) they would be willing to pay for them. Accordingly, the offer price for the IPO is determined after the closing date for offers.
3. Draft Red Herring Prospectus (DRHP)
When a company is considering an IPO, it must file and submit a Draft Red Herring Prospectus (DRHP), also known as an “offer document” or “preliminary registration document”, with market regulator SEBI. DRHP is a legal preliminary prospectus that must be approved by SEBI in order to move forward with further steps towards IPO.
4. Red Herring Prospectus
This is the final prospectus filed by the company prior to the launch of the IPO. It must be approved by the market regulator SEBI.
This prospectus contains all the information investors need about the company and the IPO, including description of the company’s business, management credentials, operating details, future strategy, price range of the IPO, the intended use of the proceeds and the timing of the IPO. The prospectus is also called an offering document.
Read also : LIC’s highly anticipated IPO is expected to launch by the end of April
5. Date of offer
This is the earliest date you can apply for shares in an IPO. It is also known as the opening date of an IPO.
6. Batch size
This is the minimum number of shares you can buy in an IPO. If you wish to bid for more shares, it must be in multiples of the lot size.
For example, if the lot size for an IPO is 2,000 shares, you must bid for at least those many shares. If you want to bid more, it must be multiples of 2000, for example 4000 and 6000.
7. Floor price
The minimum price per share that you can bid on an IPO application is called the floor price.. In the case of IPOs with a price range, it is the lower limit of that price range.
8. Issue price
This is the price at which shares are allocated to investors after the order book building process is complete. The issue price is different for each category of investors and is generally the lowest for retail investors. It is also called the offer price.
An IPO is said to be oversubscribed if investors have offered more shares than those offered by the company in the IPO.. Similarly, if investors offer fewer shares than offered, this becomes undersubscription.
IPO underwriters are financial specialists who work closely with the IPO issuer to determine the initial offering price of shares, buy the issuer’s securities and sell the securities to investors. The underwriter is usually an investment bank that helps the company prepare for the IPO, considering issues such as the amount of money to raise, the type of securities to issue, etc.
Also read: From LIC & Oyo to Byju’s: The best IPOs you should look forward to in 2022
11. Date of registration
This is the date on which the IPO shares begin trading on the stock exchange. You can sell the shares you received in the IPO and buy the shares of the company if you did not get them in the IPO.
12. Minimum subscription
This is the minimum percentage of IPO shares that you, as a retail investor, must subscribe to for an IPO to occur.
These are people such as management, directors and major shareholders who have access to information about a company’s operations that is not known to the general public. Insiders are generally subject to various restrictions and/or limitations regarding stock offerings.
14. Retention period
This is the period after an IPO during which insiders of the new public company are restricted by the primary underwriter from selling their shares in the secondary market.
15. Market capitalization
Market capitalization refers to the total market value of a company’s outstanding shares. It is calculated by multiplying the total number of outstanding shares of a company by the current market price of each share.
If the opening price of an IPO in the secondary market is higher than its offer price, the difference is the premium.
17. Lead Investor
There are different categories of investors who can apply for shares in an IPO. One such category is qualified institutional buyers, which includes commercial banks, public financial institutions, mutual funds, foreign portfolio investors, etc. ₹10 crore shares.
18. Abbreviated Prospectus
It is defined as the succinct summary of the main prospectus and includes all useful and materialistic information about the company and the IPO. In accordance with section 33(1) of the Companies Act 2013, a condensed version of the main prospectus, in the form of a short form prospectus, must be attached to the documents when submitting the IPO form .
19. Construction of the inverted book
Reverse Book Building is a mechanism by which the company offers to buy back shares from shareholders. The objective is price discovery, which is achieved by collecting offers from shareholders at different prices, above or equal to the floor price. Then, the redemption price is determined after the closing date of the offer of the bookbuilding process.
Another commonly heard term in IPOs is the blocked amount backed application (ASBA).
Market regulator SEBI has designed a process to ensure that an investor’s account is not debited unless the shares are allotted. As part of the ASBA process, the investor submits an application containing an authorization to the Self-Certified Syndicate Bank (SCSB) to block the funds available in the applicant’s savings bank account or current account to subscribe to an issue , to the extent of the request money, until finalization. from issuance or until withdrawal/failure of issuance, or until withdrawal/rejection of an application, as the case may be.
With this account, the money remains in the investor’s account but is blocked until the shares are allocated. After that, depending on the number of shares allocated, the exact amount is debited and the balance is released. This makes the IPO process both simpler and faster.
Read also : India’s first ‘unicorn couple’ now aiming to launch IPOs as early as this year
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