Key terms related to IPOs that must be understood

2021 has been a glorious year for the Indian primary market, with an incredible 65 companies coming up with their IPO. While some of them have made significant listing gains and others may be facing stagnation in terms of their market price, it has become rather important for one to understand all the jargon which gets thrown around during a major listing. In this article, we will get familiar with the key terminologies around an IPO.

Let’s begin by quickly understanding what an IPO means. An IPO is the acronym for the term Initial Public Offer. Through an IPO, a company offers its shares to the public for the first time. Post IPO shares get listed on the stock exchanges like NSE or BSE and they start getting traded on the exchanges amongst the participating investors.

Let’s now go through a few key terminologies which are important to understand an IPO.

DRHP

The DRHP stands for the Draft Red Herring Prospectus and is drafted by merchant bankers on behalf of companies which plan on going public.  It is a source of information for investors to understand why one should consider investing in the company and is filed with the Securities and Exchange Board of India (SEBI) to review the document. The DRHP consists of information about the company, its operating industry, business model, its shareholders, and financials along with other information.

Abridged prospectus

This is a condensed version of the IPO prospectus containing all the salient features and characteristics of the main prospectus and every IPO application form is accompanied by the abridged prospectus.

Book running lead manager

The book running lead manager, or the lead manager is the merchant banker appointed by the company launching the IPO, who plays an integral role in ensuring smooth completion of the IPO, right from the pre-issue stage to the post-offer activities. The book running lead manager conducts due-diligence of the company, drafts the offer documents, ensures compliance with SEBI norms along with a multitude of activities involved in an IPO.

Underwriter

An underwriter is either a single or a group of merchant bankers who work closely with the company issuing the IPO and perform activities like deciding the offer price, marketing the IPO, distributing the shares, amongst multiple other activities.  In case of an under-subscription issue, they will ensure that it sails through.

Price band

This is the price range within which investors can bid for the shares being offered through the book building IPO. As an example, if the price band has been fixed at Rs.250-260 per share, then one can’t bid below Rs.250 and above Rs.260. The price band is decided by the company and the merchant banker basis the company financials and peer companies market price valuation.

Floor price

The floor price is the minimum price per share that one can bid for in an IPO and is the lower limit of the price band.

Lot size

The lot size stands for the minimum number of shares one can bid for in an IPO and if one wants to bid for more shares, then bidding has to be done in multiples of this lot size. As an example, if the lot size is 500 shares for an IPO, then one has to bid for at least these many shares. And subsequent bids have to be made in multiples of 500, like 1000, 1500 and so on. Usually, a lot value is in between Rs. 14,000 to Rs. 15,000.

Issue price

Once the book-building process gets completed, the issue price or the offer price is the price at which the shares get allocated to the investors. It is decided on the basis of the number of bids received at different price points.

Cutoff price

The cutoff price is the issue price at which the shares get allotted in an IPO. Usually, retail investors don’t bid at a specific price and apply at cut-off. It means they agree to purchase the share at the issue price that the company will decide after closing the IPO. If an investor bids at a lower price than the issue price, their application will be rejected. On the other hand, if an investor’s bidding price happens to be higher than the issue price, then the difference gets refunded to the investor.

Book building

It is one of the two types of an IPO where the company does not decide a fixed price at which it wishes to sell shares in the IPO, instead it undergoes the process of price discovery to discover the right price by judging the demand of its shares across the price band it has decided. The issue price is at the upper end of the price band if investors demonstrate strong interest and bid high. Otherwise it is at the lower band or in between the lower and upper price band.

ASBA

The acronym ASBA stands for Application Supported by Blocked Amount, a method implemented by SEBI to protect investor’s interests by ensuring that investors’ funds don’t get debited from their accounts unless the shares they applied for in an IPO get allotted to them. Under ASBA, the respective amount stays blocked until the shares are allotted and is unblocked if the shares are not allotted, or that exact amount is debited once the shares get allotted.

Issue open and closing date

This is the opening and closing date of the IPO, which means it is the first and last date when one can start applying for the shares being offered by the issuing company.

Listing date

This is the date on which the shares issued by the company get listed on the stock exchange and start getting traded amongst the participating investors.

QIB, RII, NII, anchor investors

These are the various types of investors in an IPO and each category has pre-defined quota of shares. QIB stands for Qualified Institutional Buyers, is a category of investors which includes investors like financial institutions, mutual funds, foreign portfolio investors. Usually, 50% of the offer size is reserved for QIBs if a company has three straight years of profit otherwise it can be increased to 75%.

RII or the Retail Individual Investors consists of resident Indian individuals, Non-Resident Indians (NRIs) and Hindu Undivided Families and they are not permitted to invest more than Rs. 2 lakh in an IPO. Usually, not less than 35% of the issue is reserved for RIIs.

NII stands for Non-institutional investors consisting of Resident Indians, NRIs, Hindu Undivided families, companies, corporate bodies, societies and trusts who can apply for upwards of Rs. 2 lakh worth of shares. High net-worth individuals or HNIs also fall under this category, and usually 15% of the offer size is reserved for NIIs.

Anchor investors are those QIBs who apply for shares worth more than Rs. 10 crores or more and invest in an IPO before it opens to the public.

Minimum subscription

It refers to the minimum number of shares that the investors need to subscribe to for an IPO to sail through. Currently, 90% is the minimum subscription mandated by SEBI for all companies going through with their IPOs and if this threshold isn’t met, then the company has to refund the entire subscription amount.

Oversubscription

Oversubscription is said to occur when the number of shares that the investors have bid for is higher than the shares offered by the company issuing the IPO. An oversubscribed IPO is indicative of the high demand for the shares offered by the company.

Undersubscription

Conversely, undersubscription is said to occur when the demand for the issue of securities is less than the number of shares offered by the company.

After reading to all of this, you should have become considerably aware of the main terms related to an IPO, and you can better assimilate the information while judging the companies which will subsequently go public in the future.

Also Read: All you need to know about IPO application process

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