Once you come across the news of any upcoming IPO and the investor in you surely gets happy.
Am I correct?
No matter how distressing the year 2020 was for the world economy, once the stock markets started to correct themselves, a chain of IPOs flourished in the stock market.
If and when you decide to place their bets in any upcoming public offering, you need to go through the IPO prospectus and in order to grasp each information correctly, it is important that you are aware of the important terms mentioned in it.
Now, if you are not an expert in this field, it might look like a jigsaw puzzle.
But, shed your worries right now.
In this blog, there is a compilation of 10 key terminologies used in IPO and after reading them you won’t find any difficulty in decoding the IPO prospectus.
You can also check out our IPO: A Complete Guide. Do read it here.
Given below are the set of pivotal terms that you must be acquainted with as an informed investor.
I am pretty sure all of you must have a given a presentation either during your school time, in college or definitely in your jobs. The process involves compiling all the necessary data and information about a given topic or an idea so as to present to others. Well, the concept of Draft Red Herring Prospectus is similar, wherein the company that decides to go public have to compile a prospectus mentioning all the necessary information regarding the public issue with the Securities Board of India.
The DRHP needs to be submitted before 21 days of the IPO launch date so that if any changes are suggested by SEBI, they can be amended. The most important point you must be aware of is that not only SEBI but general people may also submit their views with SEBI regarding any DRHP.
You can view the draft public issues filed with SEBI here.
You must have guessed by the usage of the term ‘band’ that this term denotes some kind of range. Therefore, the price band is the range of price within which the interested investors can make their bets in the concerned IPO.
The lot size denotes the minimum number of shares that you are allowed to big in any IPO. Remember, the bid you make in any IPO should be in multiples of the pre-set lot size and you cannot place your bid apart from what is set beforehand by the company and approved by SEBI. For instance, if the size of 1 lot is 1,000 shares then you need to make a bid of a minimum of 1,000 shares (1 lot) while the IPO is open for subscription. If you wish to place a bid for more shares then you would go ahead with a multiple of 1,000 like 2,000 or 3,000, so on and so forth.
As the name suggests, floor price denotes the minimum price of each share that an investor is allowed to invest in. Suppose, a company decides to give a price band for its IPO then in that case the lower limit is defined as the floor price. For instance, if the price band is that of Rs. 100-110 then, in this case, the floor price is Rs. 100 per share.
The offer date is also termed as the opening date of the concerned IPO. It is simply the date on which the IPO open up for investors to subscribe. The opening date or offer date is decided during the underwriting process and it is the first day on which the public issue is made available for the investor to make their bids. The underwriting process is done by a team of professionals from investment banks (hired by the concerned company) who look after the entire IPO process.
The process of book building is defined as the process of arriving at the efficient issue price of a share. The mechanism of book building involves collecting the bids at a price that is either above or equal to the floor price from all the investors.
Further, the efficient issue price is closer to the upper side of the price band if the investors show good interest in the IPO whereas the efficient issue price is closer to the lower side of the price band if the investors show limited response to the IPO.
After the book building process gets over, there is a set price at which the allotment process of the shares takes place after the IPO is closed. This price is termed as issue price. Further, the issue price differs for each investor class and usually, it is kept lowest for the retail investors.
The minimum price at which the share allotment is done to the investors is called the cut-off price, The cut off price is mainly reserved or set for the investors belonging to the retail category. And, if you have made a bid at a higher price than the cut-off price during the time when IPO is open for subscription, then do not worry. This is because the difference is refunded to you within some time.
The term underwriter is used for the investment bank hired by the company that decides to go public through the process of IPO. There is a range of work performed by the underwriter, such as discussing (with the management of the company) and deciding the offer prices, handling the marketing of the IPO, distributing the shares, etc. In return for the services provided by the underwriter, it is paid a certain fee by the company.
Lastly, the listing date is the date or day on which the shares of the company get listed on either BSE, NSE or both the stock exchanges. Once listed on any stock exchange, the shares allotted to you in the IPO can be either be held or sold. The decision is yours! In fact, if you have not got any share in the allotment process then you can go on to buy shares from the stock market after listing.
I hope now you will not find any difficulty in understanding the nuances of the IPO prospectus.