IPO Terminology: Key Terms Related to IPO

In this article, we will cover

• An Overview: Initial Public Offering or IPO
• The most common terms that are used in the IPO terminology
• Basis of Allotment or Basis of Allocation

Do you want to acquire credible information related to the IPO? If yes, then read the information given below carefully and learn about different terminologies provides in IPO.

An Overview: Initial Public Offering or IPO

According to the latest trends, it has been observed that many companies have issues with information about their IPOs to attract more investors so that profits can be generated. IPO is considered a smart way to earn high returns with fewer risks if one wants to follow a short-term investment path. To get in-depth information related to IPO it is important that one should be well-versed in the glossary. So let us start now! Now the question is what is an IPO? Basically, it is a process in which a private company decides to offer its shares to investors through Initial Public Offerings. By entering an IPO market a company or an organization is interested in generating long-term capital or investments for sustainability.

Watch this video to understand, What is IPO and How to Apply It

The most common terms that are used in the IPO terminology are as follows:

• Abridged Prospectus

If an individual is planning to invest in an IPO the first document that must be ready is the prospectus of the IPO. According to the Companies Act, of 1961 all the application forms that are needed to be accompanied by a condensed version of the main prospectus of the IPO. This whole procedure is known as an Abridged prospectus which contains the most important features of the main prospectus available in the market.

• Anchor Investor

There are many categories of investors who are eligible to apply for shares in an IPO. Qualified Institutional Buyer or QIB is one such buyer which includes entities such as foreign portfolio investors, mutual funds, public financial institutions, commercial banks, etc in which 50% of the offer is reserved for the QIBs. Now in the category of QIB, there is a subcategory known as Anchor Investor. They can apply for shares whose worth is more than Rs 10 crore in an IPO market. In addition, one should note that in the QIB category, 60% of the shares are reserved for the Anchor Investors.

• Cut Off Price

According to the Red Herring Prospectus, the issuer may decrease the price range or the floor price if they are following the book-building method. The final prices issued for the shares are either above the floor price or in the range of the stated price as per the case or situation. The price according to which the shares are issued in a book-building IPO is known as the Cut off price. The issuer will determine the price which is based upon the demand for the shares and the cost which the buyers are willing to agree upon.

• Bid Lot

If you are trying to grasp information about an IPO glossary then Bid lot is one of the topics that you cannot miss. So let us have a look at it! All the IPOs have a minimum share that an applicant must apply for which is known as the minimum order quantity or Bid Lot. An individual cannot apply less than a specified bid lot.

• ASBA

ASBA is also known as Application Supported Blocked Amount. It is a term that most people will hear if they are trying to gain information about the IPO application process. The SEBI OR Securities and Exchange Board of India initiated a process to ensure that the investor's account is not debited till the timeshares are allotted. In earlier times investors had to make prior payments to the company at the time of application to enter the market. With the involvement of an organization, the money will always remain in the account of an investor but it will remain blocked until a sufficient number of shares are allotted to them. Once the share is allotted the exact money will be debited and the balance can be used. Hence, this process is considered simple, fast and accurate compared to others.

Basis of Allotment or Basis of Allocation

After receiving all the bids the registrar of the IPO segregates them into numerous categories. They can be qualified institutional buyers, retain investors, non-institutional investors, etc. now for each category the registrar accesses the over and under subscription by comparing the bids with the number of shares available in the market. The further segregation by the authorities of the bid shows results like if they are oversubscribed then the oversubscription ratio to the number of shares applied by the application will be considered. This ratio will help in determining the number of shares that the registrar will allot to the applicants in said situation. This complete set of information is summarized according to the Basis of Allocation of Basis of Allotment document which is published by the registrar for the investors and stock exchange.

• Book Building

Whenever a company decides to launch its IPO in the public domain there are two ways through which it can initiate this process. One is the fixed price method and the other is the book-building method. When a company or an organisation chooses the book-building method it cannot determine a fixed price at which it wants to sell the specified shares in the IPO. They do it to access the right price according to the demand for the shares. So they declare a price range according to the bid of the investors. People interested in purchasing the shares must submit the application with the bid price and the number of shares they are interested in purchasing. Once the bidding procedure is complete the company can determine the cut-off price which is done by analysing the application received. This vast procedure is called book building.

• Floor Price

When an issuer is convinced that he/she wants to launch a book-building IPO they will invite bids from the applicants for the shares. To launch a book building issue a minimum specified price at which the bids will be accepted and the maximum ranges are required. The lowest price included in the range is known as the floor price of the IPO.

• Book Running Lead Manager

Whenever a company enters the market to launch its IPO they require a merchant bank to conduct activities like draft offer documents, and prospectus and create a memorandum with significant features of the prospectus. The individual who is trained and qualified to perform these tasks are called the lead manager or book-running lead manager in a book-building process. The book-running lead manager ensures that the work is done according to the requirements of SEBI, stock exchanges and registrar of companies. All the integral activities from the pre-issue stage to the post-offer stage are done by the BRLM to ensure the smooth completion of the IPO.

• Listing Date

Once the process of IPO closes and shares are allotted they are then listed on the stock exchange for trading in the secondary market. A particular date on which this event takes place is known as the listing date of the stock. One should note that the lead manager must ensure that the stocks are credited to the demat accounts of the applicants who have been allotted the shares before the date of listing. So investors may start trading these shares on the listing day only.

• Non-Institutional Investor

There are many different categories under which investors can apply for shares in the IPO market. A Non Institutional investor or NII must include the information of all the eligible Indian ressnets, non-residents Indians, corporate bodies, Hindu Undivided Families, societies, science institutions, trusts, etc. NIIs are eligible to invest more than 2 lakhs in an IPO and can withdraw their bids until the allotment process is finalized. In addition, they are not allowed to bid the cut-off price and 15% of the IPO is reserved for the NIIs.

• Qualified Institutional Buyer [QIB]

A Qualified Institutional Buyer or QIB is a particular category of investors that includes commercial banks, foreign portfolio investors, public finance institutions and mutual funds among many more. QIBs are not allowed to bid at the cut-off range or withdraw the bid after the closing of the IPO in the market. At least 50% of the shares of the total issue in a book-building IPO are reserved for QIBs.

• Retail Individual Investor [RII]

RII is a category of interested investors which includes the residents of India, Hindu Undivided families and non-resident Indians. These investors are allowed to invest not more than 2 lakhs in an IPO market. In addition, they can withdraw their bids until the allotment procedure and can bid according to the cut-off price. One should note that 35% of the shares of the total issue size in a book building in an IPO market is reserved for Retail Individual investors.

• Red Herring Prospectus [RHP]

RHP or Red Herring Prospectus is an offer document of the company that must be filled with the Securities and Exchange Board of India [SEBI]. It is a mandatory process. The prospectus contains the details of the objectives of the company and the reason for going into the public domain. The RHP also constitutes another important piece of information like litigations if any, nature of the business issuer, industry details, financial information of the company, etc. One should note that the prospectus does not contain information on the final price according to which the shares will be allotted.

• Bonus Issues

Bonus issues are the shares which are issued to capitalize the reserves and surplus of the company without charging the shareholders. From the perspective of accounting it involves the debit to the free reserved and a credit to share capital.

• Brokerage

Brokerage is defined as the commission which is paid to the brokers on the sales and purchase of shares.

• Underwriter

When an investment firm enters a contract with the issuing company to manage the IPOs it is known as the Underwriter. They play a role in buying the remaining shares when a particular IPO is undersubscribed. In addition, underwriters are also involved in deciding the offers of distributing shares to investors, marketing the IPO and deciding the offer price. One should note that an underwriter receives a fee in return for the services they are offering to the customers.

• Stockbroker

Organizations such as IIFL are the participants that will allow the investors to buy and sell the shares or apply to various IPOs. They can offer investment services and facilitate the selling or purchase of shares in a trading environment. Stockbrokers are the individuals that open an account and make all these activities possible.

• Oversubscribed/Undersubscribed

In a market if a company receives more applications compared to the shares they are offering then the issue is said to be oversubscribed. Similarly, if the issue received fewer applications than the shares they are offering in the market the IPO issue is termed as undersubscribed.

• Issue Price

The issue price is defined as the price at which the shares are allocated to the applicants interested in it. The issue price is different from the cut-off price as this concept is only applicable to retail investors. In addition, the issue price can be different for the different categories of investors.

• At the Money

At The Money or ATM is an option contract with a strike price which is identical to the current price of the stock. One can pay a small fee called the premium to start the purchase.

• Auction

Action is defined as the standardized methods which are used to buy and sell orders simultaneously. In an auction market, there is no scope for negotiation. For example, a stock exchange is considered an ideal situation for an auction market.

• Arbitrage Funds

It is a type of mutual fund that can generate profits through the process differences between the cash and derivatives in market segments. Arbitrage funds are considered safer than equity funds. In addition, they offer the same returns as debt funds.

Conclusion

IPO glossary is vast with an involvement of various terms and terminologies. So if you are trying to find a single place to get all your answers then consider our curated IPO glossary now!