What are the key terms related to IPO?

Last Updated: 27 Jun 2024

The last few years have been tempting for retail investors as over 100 companies issued their IPOs, thereby resulting in significant profits. An IPO is a lucrative way to earn high returns with less risk in the short term. However, there are numerous IPO terms associated with the process. Understanding the IPO terminology is vital in ensuring that the issue opens at a premium and not at a discount.

What is an IPO?

This is when a private company decides to offer its shares to investors via an Initial public offering (IPO). It is the first sale of shares by a company to the public, institutional investors, and HNIs. An IPO market is primarily where firms look to access long-term capital. For listing on the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE), a company has to have a minimum paid-up capital of Rs 10 crore. Furthermore, the post-issue market capitalization should not be below Rs 25 crore.

The following terms are included in the IPO terminology:

• Abridged Prospectus: This is a condensed version of the main IPO prospectus containing all the IPO issue’s basic features. It is mandatory for all companies filing for an IPO to attach the abridged prospectus with the application form under the Indian Companies Act, 1961.
• Draft Red Herring Prospectus: It is an offer document issued by the company with SEBI and the Registrar of Companies before the IPO process. It is the holy grail for analyzing a company that contains the objectives of the issue and all the operational and financial information about the company.
• Anchor Investors: 50% of the IPO issue size is reserved for Qualified Institutional buyers such as banks, financial institutions, mutual funds houses, etc. Within the QIB category, anchor investors apply for shares worth Rs 10 crores or more. 60% of the QIB reservation is reserved for anchor investors.
• Stockbroker: Entities such as IIFL, are depository participants that allow investors to buy and sell shares or apply to IPOs. They provide investment services and facilitate the purchase/selling of shares in the trading process. Stockbrokers are the ones that open a account
• Bid Lot: Every investor applying to an IPO has to apply to a minimum number of shares called a ‘Lot’. These ‘Lots’ and the number of shares within them are pre-determined by the company. Investors can apply to multiple lots, too.
• Fixed Price/Book Building: A company can issue an IPO through two methods: Fixed price and Book Building. Under the fixed price, the company announces the full price of its IPO beforehand. Under the Book Building method, the company sets a price range and finalizes the price after calculating the investor demand.
• Floor Price: The floor price of an IPO is the minimum bid price you can choose while applying to an IPO. It is the lower price limit of the price band chosen by a company.
• Issue Price: It is the price at which the shares are finally allotted to the applications after the book building IPO issue closes. The issue price is different for each investor category.
• Cut Off Price: This is the lowest price at which the shares are allotted to investors and is generally reserved for retail investors. If you bid a higher price than the cut-off price, the balance is refunded to you.
• Oversubscribed/undersubscribed: If the company receives more applications than the offered shares, the issue is known to have been oversubscribed. If the issue receives fewer applications than the offered shares, the IPO issue is referred to as undersubscribed.

What are the steps in the IPO process?

Here are the steps included in the ipo process for a company looking to list on the NSE or BSE:

Step 1: A merchant banker or Book Running Lead Manager (BRLM) underwrites the company’s shares, buying all or some of the IPO shares and selling them to the public. The bank helps the company with the IPO process, assisting with the due diligence, DRHP, and IPO roadshow. The underwriters bear the risk of the transaction.

Step 2: Companies have to file for an IPO with SEBI, the market regulator. The application needs to include the documents listed for the IPO Vetting Process. It includes DRHP, details of the promoters, and the company’s annual reports. The initial listing fee is Rs 50,000, which depends on the paid-up share capital.

Step 3: The company then markets the IPO. Usually, prices are set below the actual price to create excitement among investors. Marketing is typically done through advertisements to inform people about the company’s offering. This process is also called the IPO roadshow. Subsequently, the price band is decided, and the merchant banker or underwriter of the share offer decides the IPO price.

Step 4: For three days, the company’s shares are open to the public for subscription. On a listing day, the company begins trading on the stock exchange at a listed price based on market demand for the issue.

Knowing these IPO terms goes a long way in making informed investment decisions and applying to IPOs that open at a premium. To apply for an IPO, you need to open a free Demat account with IIFL that comes with zero annual maintenance fee and inventive investor-oriented tools such as Trader Terminal and TT Iris. You can visit IIFL’s website or download the IIFL Share Market app to open a free Demat account in simple steps.

Frequently Asked Questions

What is the difference between IPO and share?

IPO is the process of selling the shares of a privately held company to the public for the first time. So the IPO is the process, and the result is investors getting the company shares.

Are IPOs a good investment?

IPOs are considered an ideal investment as they can provide hefty returns in a short time. However, it is wise to learn the IPO terminology and analyse the company before applying for an IPO.