Want to participate in upcoming IPOs but not sure of what certain terms mean? Look no further! Check out the most commonly used terms associated with an IPO and what they mean. Read on!
When you are thinking about investing in an IPO, the first document that you would want to get your hands on is the prospectus of the IPO. As per the Companies Act, 1961, all IPO application forms need to be accompanied by a condensed version of the main IPO prospectus. This is known as the Abridged Prospectus, and it carries all the salient features of the main prospectus.
There are various categories of investors that can apply for shares in an IPO. One such category is a Qualified Institutional Buyer or QIB that includes commercial banks, public financial institutions, mutual funds, foreign portfolio investors, etc. 50% of the offer size is reserved for QIBs.
Under this category, there is a sub-category called Anchor Investors who apply for shares worth Rs.10 crore or more in the IPO. In the QIB category, 60% of the shares are reserved for Anchor Investors.
Application Supported by Blocked Amount or ASBA is a term you will frequently hear while researching the IPO application process.
The Securities and Exchange Board of India (SEBI) designed a process to ensure that the investor’s account doesn’t get debited unless the shares are allotted. Earlier, investors had to make a payment to the company at the time of application.
Eventually, based on the number of shares allotted, the company would refund the excess to the investor. This was a time-consuming process.
With ASBA, the money remains in the investor’s account but is blocked until shares are allocated. Post that, based on the number of shares allotted, the exact amount is debited and the balance is unblocked. This makes the IPO application process simple and fast.
Also Read: Frequently Asked Questions on IPO
Basis of Allocation or Basis of Allotment
On receiving all the bids when the issue closes, the registrar of the IPO separates them into different categories like retail investors, non-institutional investors, qualified institutional buyers, etc. For each category, the registrar assesses if there has been an over or under-subscription by comparing the bids received to the number of shares available under each category.
The registrar further segregates the bids and if over-subscribed, applies the over-subscription ratio to the number of shares applied for by each applicant. This helps determine the number of shares that the registrar can allot to each applicant in the said bucket.
This information is summarized in the Basis of Allocation or Basis of Allotment document published by the registrar to stock exchanges and investors.
Every IPO has a minimum number of shares that applicants need to apply for. This is called the Bid Lot or minimum order quantity. Let’s say that an issuer specifies a Bid Lot of 100 and in multiples of 100 with a price range 200-250. This means that the applicant cannot apply for less than 100 shares in the IPO. Also, if the applicant wants to apply for mare shares, then it has to be in multiples of 100 like 200, 300, 400, etc.
There are two ways in which a company can launch an IPO – fixed-price method and book building method. When a company opts for the book building method, it does not determine a fixed price at which it wants to sell the shares in the IPO.
Instead, it tries to discover the right price by assessing the demand of the shares. Hence, it declares a price range within which investors can bid. People who want to buy shares of the company submit an application with the bid price and the number of shares they want to purchase at the said price. Once the bidding process is over, the company determines the cut-off price based by analyzing the applications received. This process is called book building.
Book Running Lead Manager
When a company launches an IPO, it needs to appoint a merchant banker to conduct due diligence of the company, draft offer documents, prospectus, and a memorandum with the salient features of the prospectus. This merchant banker is called the Lead Manager or a Book Running Lead Manager (BRLM) in case of a book-building process.
The BRLM ensures compliance with the statutory requirements of SEBI, Registrar of Companies, and stock exchanges. Right from the pre-issue stage to the post-offer activities, the BRLM plays an integral role in ensuring the smooth completion of the IPO.
In the Red Herring Prospectus, the issuer declares the price range or the floor price if it follows the book building method. The final price at which the shares are issued is either in the stated price range or above the floor price, as the case may be. The price at which the shares are issued in a book building IPO is called the Cut-off Price. The issuer determines this price based on the demand for the shares and the price that most people are willing to pay for them.
When an issuer decides to launch a book building IPO, it invites bids from applicants for the shares. However, to launch a book building issue, the issuer is required to specify the minimum price at which it will accept bids and the maximum range too. The lowest price of this price range is the floor price of the IPO.
Once the IPO closes and the share allotment process is done, the shares are officially listed on the stock exchange to allow for trade in the secondary market. The date on which this happens is known as the Listing Date of the stock.
It is important to note that the BRLM or Lead Manager has to ensure that the stocks are credited to the Demat accounts of all applicants who have been allotted shares, before the listing date. Hence, investors can start trading in these shares on the listing day itself.
Non-Institutional Investor (NII)
There are different categories under which an investor can apply for shares in an IPO. The non-institutional investor or NII includes eligible resident Indian individuals, non-resident Indians (NRIs), Hindu Undivided Families (HUFs), corporate bodies, companies, trusts, science institutions, and societies. NIIs can invest more than Rs.2 lakh in the IPO and can withdraw their bids until allotment. They are NOT allowed to bid at the cut-off price. Around 15% of the IPO is reserved for NIIs.
Qualified Institutional Buyer (QIB)
The qualified institutional buyer or QIB category of investors includes Mutual funds, public financial institutions, foreign portfolio investors, and commercial banks, etc. QIBs are not allowed to bid at the cut-off price or withdraw the bid after the close of the IPO. Further, nearly 50% of shares of the total issue size in a book building IPO is reserved for QIBs.
Retail Individual Investor (RII)
The retail individual investor or RII category of investors includes resident Indian individuals, non-resident Indians (NRIs), and Hindu Undivided Families (HUFs). RIIs are not permitted to invest more than Rs.2 lakh in an IPO and can withdraw their bids until allotment. Further, they can bid at the cut-off price. Also, 35% of shares of the total issue size in a book building IPO is reserved for RIIs.
Red Herring Prospectus
A Red Herring Prospectus (RHP) is the offer document of the issuer company that has to be filed (mandatory) with the Securities and Exchange Board of India (SEBI). It has details about the objectives of the company and the reason why it has decided to go public. It also has other important information like the financial information of the company, industry details, nature of the business of the issuer, litigation if any, etc. However, it does not contain information about the final price at which shares will be allotted.
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