Decoded: 20 Must Know Terms Before Investing In Any Company's IPO

One term that has dominated the pink papers, business news channels and financial portals over the past couple of years or so, is IPO (Initial public offering).

A lot of startups and companies have caught the IPO fever, with some like Zomato, Paytm, Nykaa etc already public, and some like LIC, Swiggy, Flipkart, Oyo etc planning to go public soon.

All this has built a lot of hype around IPOs and made them the talk of the town in the financial world. And amidst this hype, people often get gripped by FOMO (fear of missing out).

But before you get too excited to jump onto the IPO bandwagon and invest your hard-earned money, isn't it important to understand some vital terms related to IPOs?

So here¡¯s a list of 20 must-know IPO terms you should understand before dipping your feet into it.

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1. Price Band

This is the price range within which investors can bid for IPO shares.

For example, if the company offers its shares in the range of ?100-110 per share, then this is the price band for the share price set for the IPO. The price band is set jointly by the company and the underwriter and is different for each category of investors, like. qualified institutional buyers (QIBs), retail investors, and high net-worth individuals (HNIs).

2. Book Building Process

Book building is the process by which an underwriter attempts to determine the share price to offer during IPO. The underwriter does the price determination by inviting investors to submit bids for the number of shares and the price(s) they would be willing to pay for them. Accordingly, the offer price for the IPO is determined after the bid closing date.

3. Draft Red Herring Prospectus (DRHP)

When a company plans for IPO, it has to file and submit a Draft Red Herring Prospectus (DRHP), also known as the 'offer document' or 'preliminary registration document', with the market regulator SEBI. DRHP is a legal preliminary prospectus which has to be approved by SEBI in order to go ahead with further steps towards IPO.

4. Red Herring Prospectus

This is the final prospectus filed by the company before launching the IPO. It has to be approved by the market regulator SEBI.

This prospectus contains all the information that investors need about the company and the IPO, including the company¡¯s business description, management credentials, operating details, future strategy, IPO price band, the intended use of the proceeds, and the IPO calendar. The prospectus is also known as the offer document.

Also Read: Much-awaited LIC IPO Expected To Be Launched By The End Of April

5. Offer Date

This is the first date when you can apply for shares in an IPO. It is also known as the opening date of an IPO.

6. Lot size

This is the minimum number of shares you can bid for in an IPO. If you want to bid for more shares, it has to be in multiples of the lot size.

For example, if the lot size for an IPO is 2000 shares, you have to bid for at least these many. If you want to bid for more, it should be in multiples of 2000, such as 4000 and 6000.

7. Floor Price

The minimum price per share which you can bid when applying for an IPO is called the Floor Price. In the case of IPOs with a price band, this is the lower limit of that price band.

8. Issue Price

This is the price at which shares are allotted to investors once the book building process is over. The issue price is different for each investor category and is generally the lowest for retail investors. It is also called the offer price.

9. Oversubscription

An IPO is said to be oversubscribed if investors have bid for more shares than those offered by the company during IPO. Similarly, if the investors bid on lesser shares than those offered, it becomes an undersubscription.

10. Underwriter

Underwriters in an IPO are financial specialists who work closely with the IPO issuing body to determine the initial offering price of the shares, buy the securities from the issuer, and sell the securities to investors. The underwriter is usually an investment bank that helps the company prepare for the IPO, considering issues such as the amount of money sought to be raised, the type of securities to be issued etc.

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Also Read: From LIC & Oyo To Byju's: Top IPOs You Should Look Forward To In 2022

11. Listing Date

This is the date on which IPO shares start trading on the stock exchange. You may sell the shares you received in the IPO and buy the company¡¯s shares if you didn¡¯t get them in the IPO.

12. Minimum Subscription

This is the minimum percentage of IPO shares that you, as a retail investor, need to subscribe for an IPO to go through.

13. Insiders

These refer to the persons such as management, directors, and significant stockholders who are privy to information about the operations of a company that is not known to the general public. Insiders are usually subject to various restrictions and or limitations regarding equity stock offerings.

14. Lock-up period

This is the time period after an IPO wherein insiders at the newly public company are restricted by the lead underwriter from selling their shares in the secondary market.

15. Market capitalization

Market capitalization refers to the total market value of a company's outstanding shares of stock. It is calculated by multiplying the total number of a company's outstanding shares by the current market price of each share.

16. Premium

If the opening price of an IPO in the secondary market is higher than its offering price, the difference is the premium.

17. Anchor investor

There are various categories of investors that can apply for shares in an IPO. One such category is qualified institutional buyers, which includes commercial banks, public financial institutions, mutual funds, foreign portfolio investors, etc. Under this QIB category, itself is a subcategory called anchor investors, who make a bid under an IPO for a minimum of ?10 crores worth of shares.

18. Abridged prospectus

It is defined as the brief summary of the main prospectus and includes all useful and materialistic information about the company and the IPO. As per Section 33(1) of the Companies Act, 2013, a condensed version of the main prospectus, in the form of an abridged prospectus, must be included with the documents when submitting the IPO form.

19. Reverse book building

The Reverse Book Building is a mechanism wherein the company offers to buy back shares from the shareholders. The aim is price discovery, which is achieved by collecting offers from the shareholders at various prices, which are above or equal to the floor price. Then the buyback price is determined after the offer closing date of the book-building process.

20. ASBA

Application supported by the blocked amount (ASBA) is another commonly heard term in IPOs.

Market regulator SEBI designed a process to ensure that an investor¡¯s account doesn't get debited unless the shares are allotted. Under the ASBA process, the investor submits an application containing an authorization to Self-Certified Syndicate Bank (SCSB) to block funds available in the applicant¡¯s Savings Bank Account or Current Account for subscribing to an Issue, to the extent of application money, till finalization of allotment in the issue or till withdrawal/ failure of issue, or till withdrawal/ rejection of an application, as the case may be.

With this account, the money remains in the investor¡¯s account but is blocked until shares are allocated. After that, based on the number of shares allotted, the exact amount is debited and the balance is unblocked. This makes the IPO process both simpler and faster.

Also Read: India's First 'Unicorn Couple' Now Aims To Roll Out Their IPOs As Soon As This Year

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