These days, many investors, including experts and beginners, especially in the Indian stock market, seem to be pumped up about investing in IPOs or Initial Public Offerings of companies. As disturbing as it was, the past year did bring about a chain of successful IPOs, which made them seem like an attractive investment opportunity as they created the image of providing a great return in a very short duration.
As an investor who has planned to invest in an IPO, you will have to go through the IPO process, and with that, you will come across the company prospectus or the IPO document.
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While reading through a prospectus or an IPO document, you would come across many jargons or new terms that can seem new and challenging to comprehend, especially by someone new to the stock market.
However, understanding what these terms mean can be of massive benefit to you as an investor as it allows you to better comprehend the entire picture behind the company which is announcing the IPO and other relevant details, thus enabling a healthier investment decision.
So, here’s a glance at some crucial components of an IPO and related terms that you should know:
Abridged Prospectus is the summarized form of the IPO prospectus that includes all the prominent characteristics of the primary prospectus. Under the Companies Act of 1956, all IPO application documents should be complemented by the abridged prospectus.
Draft Red Herring Prospectus (DRHP)
The company should submit the draft prospectus to Securities Exchange Board of India (SEBI) in no less than 21 days before the IPO. SEBI assesses the prospectus and asks for changes in the course of these 21 days. The general public can also suggest their comments to SEBI during this period.
Application Supported by Blocked Amount( ASBA) is a term you will encounter while researching the IPO application process. SEBI formulated a method to safeguard investors’ interest by ensuring that the investor’s account doesn’t get debited lest the shares are allotted. Previously, investors had to make a payment to the company during application.
After that, the company would refund the investor, if the shares are not allotted to them, or the allotment is less than the asked bid. It was a time-taking procedure.
With ASBA, the money stays in the investor’s account but is blocked until shares are assigned to the investors. Based on the number of shares allotted, the precise sum is debited, and the balance is unblocked.
Red Herring Prospectus
The company's ultimate prospectus is put on record with the Registrar of Companies (ROC) ahead of launching the IPO. It includes all the facts that investors need to know about the company and the IPO, comprising the company’s business account, management qualifications, operating specifics, future approach, IPO price band, the aimed use of the IPO proceeds, and the IPO calendar. The prospectus is also understood as the offer document.
The price extent within which investors can bid for IPO shares is known as the price band. It is set together by the company and the underwriter and is different for every investor class, namely, qualified institutional buyers (QIBs), retail investors, and high net-worth individuals (HNIs).
It is usually the smallest for retail investors. If the price band has been set at a range of Rs.100-110 per share, you cannot bid less than Rs.100 or more than Rs.110.
Book Building Process
It is the procedure of deciding the issue price for an IPO centred on the prices bid by investors. The issue price will be nearer to the upper end of the price band if investors have revealed strong curiosity in the IPO and bid high. Or else, it will be nearby to the lower end of the price band.
For instance, if the price band for an IPO is Rs.200-210 per share, the issue price would be set nearer to Rs.210 if investors have bid high. If investors have bid low, the issue price would be set nearer to Rs.200.
This is the starting date when you can put on your bid for shares in an IPO. It is also called the opening date of an IPO.
The smallest number of shares you can bid for in an IPO. If you need to bid for more shares, you have to bid in the multiples of the lot size.
For instance, if the lot size for an IPO is 1500 shares, you have to bid for no less than 1500 shares. If you want to bid further, it must be in multiples of 1500, like 3000 or 4500.
This is the lowest proportion of IPO shares that retail investors must subscribe to for an IPO to get through.
Currently, the minimum subscription required by SEBI is 90%. If the company doesn't meet the minimum percentage of 90%, it has to give back the entire subscription amount.
The lowest price per share you can bid when applying for an IPO is known as the Floor Price. In the instance of IPOs with a price band, the lower limit of the price band is the floor price.
This is the price at which shares are allocated to investors as soon as the book-building procedure is complete. The issue price is different for every investor class and is commonly the lowest for retail investors. It is also sometimes known as an offer price.
The lowest issue price at which shares are allotted in an Initial Public Offering is known as the Cut-off price. It is generally reserved for retail investors.
If your bidding price is more than the cut-off price, the remainder will be refunded.
An oversubscribed IPO is an IPO where investors bid far beyond the shares proposed by the company.
The additional subscription sum obtained by the company in the situation of an oversubscribed IPO is called oversubscription.
The issuing company requires an investment bank to manage the IPO. These investment banks in the IPO process are known as the underwriters. Amid their different roles are determining the issue price, publicising the IPO, and allocating the shares to investors.
The underwriter obtains an underwriting fee in response to its services in the IPO process.
This is the day on which IPO shares onset trading on the stock exchange. You could trade the shares you have received in the IPO and buy the company's shares if you were unable to receive them in the IPO.
Applying for a company’s Initial Public Offering (IPO) can seem to be a very complicated procedure at first. But that is mainly due to its various technicalities.
It is very easy to comprehend the IPO process as soon as you are informed about some key IPO terms. This IPO lexicon will assist you in mastering these jargons and make the most out of IPOs.