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For the uninitiated, an IPO or an initial public offering is a process by which a privately held company sells its shares to investors and gets listed on the exchange. With several IPOs lined up in the latter half of 2020, we have compiled a list of the most frequently asked questions regarding IPOs to help you understand the application process better. Read On! 

Q1. What is the Difference Between Book Building Issue and Fixed Price Issue?

When a company launches an Initial Public Offering or IPO, it can opt for one of the following methods:

  • Fixed price method
  • Book building method
  • Combination of the above two methods 

Fixed price method

When the company declares the IPO, it determines a fixed price that it wants to issue shares to investors. Therefore, investors know the exact price of the stock before the company goes public. Once the IPO closes, investors have to wait to assess the demand (and corresponding price) of the said stock. If a company has launched a fixed price issue, investors have to make the complete payment of the applied shares upfront at the time of submitting an application. If the number of allotted shares is less than that applied for, the excess funds are returned to the investor.

Book building method

In a book building issue, the company does not determine a final price but offers a price range to the investors. Hence, investors are unaware of the exact price at which the said shares will be allotted to them. They are expected to bid on the shares and the final price is determined only after the bidding is closed. A bid means the investor needs to specify the number of shares he wants to apply for and the rate he is willing to pay per share (from the range offered by the company). As the bids are registered, the company builds its book and determines the final of the share.

Q2. What is the Difference between Floor Price and Cut-Off Price for a Book Building Issue?

In a book building issue, the company does not determine the final price at which it will allot the shares. Instead, it offers a price range to investors. An investor can bid at any price in the price range decided by the company. 

The lowest price at which an investor can place a bid is known as the Floor Price. On the other hand, the highest price at which an investor can place a bid is known as the Cap Price of the IPO.

For example, if a company launches an IPO with a price range of 250-300, then

  • Floor Price = Rs.250
  • Cap Price = Rs.300

If the allotment price is Rs.275, then investors who at Rs.275 and above will receive the allotment. However, there is one more option to bid in a book building issue – Cut-off Price. For all practical purposes, this is like bidding at the Cap Price since the investor has to pay the highest price (or Cap Price) while placing the bid. Hence, despite not specifying the bid amount, he will receive the allotment at Rs.275 and a refund of the balance amount.

Comparing Floor price and Cut-off Price

Hence, the floor price is the minimum price at which an investor can place a bid in a book building issue. On the other hand, the cut-off price is the price at which the company allots the shares and the investor agrees to buy it at the said price.

Q3. What is the Difference Between RII, NII, QIB, and Anchor Investor?

When a company launches an IPO, it has various categories under which investors can invest:

  • RII – Retail Individual Investor 
  • NII – Non-Institutional Investor
  • QIB – Qualified Institutional Bidder
  • Anchor Investor

RII – Retail Individual Investor

This is the most common category of investors bidding in an IPO. This category includes:

  • Resident Indian individuals, non-resident Indians (NRIs), and Hindu Undivided Families (HUFs)
  • The maximum amount of investment is Rs.2 lakh
  • A minimum of 35% of the IPO is reserved for the RII category
  • Investors from this category can bid at the cut-off price 
  • Bids can be withdrawn until the day of the allotment

NII – Non-Institutional Investor

If an investor qualifies to bid under the RII category but wishes to invest more than Rs.2 lakh, then he falls under the NII category. This category includes:

  • Resident Indian individuals, non-resident Indians (NRIs), Hindu Undivided Families (HUFs), corporate bodies, companies, trusts, science institutions, and societies
  • Investors can invest more than Rs.2 lakh
  • A minimum of 15% of the IPO is reserved for the RII category
  • Investors from this category cannot bid at the cut-off price
  • Bids can be withdrawn until the day of the allotment

QIB – Qualified Institutional Bidder

This category includes:

  • Mutual funds, public financial institutions, foreign portfolio investors, and commercial banks, etc.
  • 50% of the offer size is reserved for this category
  • Investors from this category cannot bid at the cut-off price
  • Bids cannot be withdrawn after the close of the IPO

Anchor Investor

This is a QIB making an application of more than Rs.10 crore in a book building issue. This category includes:

  • Resident Indian individuals, non-resident Indians (NRIs), Hindu Undivided Families (HUFs), corporate bodies, companies, trusts, science institutions, and societies
  • Investors making more than Rs.10 crore application
  • Investors from this category cannot bid at the cut-off price
  • Up to 60% of the QIB category can be allocated to this category

Q4. What Does ‘DP name’ Mean in an IPO Online Form? 

In the IPO form, DP stands for Depository Participant. 

In India, there are two Depositories – National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL). Each depository has a network of depository participants which are the link between depositories and companies that issue securities. A DP can be a financial institution, bank, brokerage house, etc. registered with the Securities and Exchange Board of India (SEBI). An investor opens a demat account with a DP. The name of the DP and the DP ID needs to be specified on the form.

Q5. Is it mandatory to have a PAN Number to Apply in an IPO?

Yes, it is mandatory to have PAN to apply for an IPO. Investors must ensure that they cross-check the PAN after filling the form as any error in the same can lead to a cancellation of the application.

Q6. How Many Days Will an IPO Remain Open for the Public?

Clause 8.8.1specifies that the subscription list for public issues has to be kept open for at least three working days. Also, it cannot exceed ten working days. In case of a book building issue, the IPO remains open for three to seven days. This can be extended by three days if the price band is revised. 

Q7. What is ‘Market Lot Size’ and ‘Minimum Order Quantity’ for an IPO?

When a company launches an IPO, it specifies the minimum number of shares that an investor can apply for. This is known as the IPO bid lot or market lot size or minimum order quantity. For example, if a company specifies the minimum order quantity as 100 shares and the investor wants to purchase more than 100, then the application can be made in multiples of 100 only. Hence, the investor can apply for 100 shares, 200 shares, 300 shares, and so on.

Q8. Can I Apply for an IPO Through Multiple Applications on the Same Name?

No. You cannot apply in an IPO through multiple applications with the same name. If an investor tries doing it, then all the applications made under the same name will be rejected. Another way of doing this is to apply in the name of different family members. Just remember that the applicant should have a Demat account and PAN.

Q9. What is the Basis of Allocation or Basis of Allotment?

The Registrar of an IPO publishes a document to stock exchanges and investors providing information about the final price of the IPO, demand or bidding information, and the share allocation ratio. This document is called the Basis of Allotment or Basis of Allocation. It is important to remember that this document is categorized based on the categories of investors and the number of shares applied for. Investors can get a detailed view of the IPO including information regarding the total number of valid applications received and allocation details.

An important element of this document is the ratio of allotment that can tell an investor if the IPO has been oversubscribed and by how many times. This is important because investors can assess the number of applicants that will receive allotment from the total number of applicants. For example, if the ratio of allotment is 1:5, then one out of every five applicants will receive one lot of shares. Also, if the value of this ratio is FIRM, then all applicants definitely receive some shares.

Q10. Why is the Maximum Subscription Amount for Retail Investors Limited to Rs 2 lakh?

SEBI has classified investors into three broad categories – RIIs, NIIs, and QIBs. It has also mandated companies to reserve a fixed percentage of the IPO to each category as shown below:

  • RII – Retail Individual Investor – 35% of the IPO
  • NII – Non-Institutional Investor – 15% of the IPO
  • QIB – Qualified Institutional Bidder – 50% of the IPO

This was done to ensure that all categories of investors get an opportunity to participate in the IPO of a company. Based on their study, SEBI decided to cap the investment amount at Rs.2 lakh for an investor to qualify as a retail investor. The benefit of applying as a retail investor is that SEBI governs the allotment methodology in this category and ensures that a maximum number of retail investors receive the allotment. On the other hand, in the case of NIIs, the allotment is proportionate and for QIBs it is discretionary. To ensure that the shares reach the masses, the amount was capped at Rs.2 lakh.

Q11. What is the Procedure to Withdraw from an IPO?

 You need to login to the broker’s account from where you made the application and go to the order book. Next, you need to select the specific IPO and choose to withdraw. The money that was blocked for the application will be released within a couple of days.

However, it is important to remember that you can withdraw only during the bidding period. If the IPO does not have an online withdrawal option, then you need to contact the broker/bank through whom you applied.

Q12. Can I Sell the Stock Allotted to Me in an IPO Before the Stock Gets Listed?

No, you cannot sell the stock allotted to you in an IPO before it gets listed. On the day it gets listed, you are permitted to do the following:

  • Sell 50% of the shares allotted to you if the listing price posts 40-50% gains
  • Sell all the allotted shares if the listing price posts more than 70% gains

Q13. How is the Cut-off Price of IPO Decided?

The company and the book running lead managers (BRLMs) decide the cut off price of the IPO after considering the book and analyzing the market’s response to the stock. 

Q14. How many IPO Applications Can be Made from One Bank Account Using ASBA?

According to SEBI, an investor can make a maximum of five applications from one bank account per issue using ASBA. 

Q15. How Many Lots in an IPO Should I Apply to Get a Maximum Allocation in the Retail Category?

This is an investor-specific decision and there is no golden rule to follow. Let’s look at two possible scenarios:

1. The IPO is oversubscribed in the retail investor category

If an IPO is oversubscribed, then SEBI mandates the company to allot a maximum of one lot per investor using a lottery-based system. This means that you can get a maximum of one lot if your name is selected via the lottery system. Hence, applying for one lot makes sense.

2. The IPO is undersubscribed in the retail investor category

If an IPO is undersubscribed, then it is an indication of the lack of demand for the shares of the company. Since the IPO is undersubscribed, you will receive as many lots as you have applied for. However, the lack of demand might lead to a price collapse on listing day. Hence, applying for one lot makes sense here too.

You might want to talk to an investment advisor for more clarification.

Q16. When Should I Expect Credit for IPO Shares in my Demat Account?

While every company has different timelines, you should receive a credit of the shares applied for in an IPO in your Demat account before the listing date of the said shares.

Q17. Can I apply for an IPO through the ASBA Facility of My Bank Without Having a Trading Account?

A trading account is required to buy/sell securities in the secondary market. An IPO is launched in the primary market. Hence, it is not mandatory to have a trading account to apply for an IPO through the ASBA facility of your bank. However, you will need a Demat account to receive a credit of the allotted shares.

Q18. How Different is QIB From an Anchor Investor?

First, an Anchor Investor falls under the category of a Qualified Institutional Buyer or QIB. Here are some differences:

  • The Anchor Investor needs to apply for shares worth more than Rs.10 crore
  • The bidding price is different for anchor investors and QIBs
  • Of the total QIB allocation, 60% is reserved for anchor investors
  • Anchor investors are not allowed to sell their shares up to 30 days from the date of allotment of the said shares via an IPO

One important aspect of an anchor investor is that if the cut-off price is lower than the bid price of an anchor investor, the excess amount is not refunded to them. Since they invest more than Rs.10 crore, their participation encourages smaller investors to apply.

Q19. Is It Possible to Apply for an IPO Using the BHIM Application?

Yes, SEBI has permitted the use of UPI ID (that can be created by using BHIM application) for IPO application. At the time of filling the application form, you need to specify your UPI ID and submit it. The broker will send a request for blocking the funds to your UPI mobile application. You need to log in to the application and approve the block mandate. The amount applied for will be blocked in your bank account. Post-allotment, the exact amount will be debited (based on the allotment) and the rest will be unblocked.

Happy Investing!

Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. NBT do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.

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