Thinking about investing in Initial Public Offerings (IPOs) but finding the terms confusing? Don’t worry! This guide is here to help you understand the key words commonly used with IPOs in a way that’s simple and easy to grasp, even if you are not from finance background.
From the basic terms like Abridged Prospectus to more complex concepts like Book Building and Oversubscription, we’ll break down each term so that you can make sense of it.
Most Common and Popular Key Terms Related to IPO
1. 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.
Read : What is DRHP – Explained in Detail
2. Abridged prospectus
An abridged prospectus is a condensed version of the main prospectus in an IPO. According to regulatory requirements, every IPO application form must be accompanied by this summary document.
The abridged prospectus contains the key features and essential information from the main prospectus, providing potential investors with an overview of the IPO and its offerings. It serves as a handy reference for those considering investment in the IPO.
Also Read : What is Deemed Prospectus – Why it is Important?
3. 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.
4. 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.
5. 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.
Read this post about IPO Price band where we have explained how the IPO price range is arrived.
6. Floor price
The floor price in an IPO refers to the minimum price at which investors can place bids for shares during the book-building process.
It is the lower end of the price band predetermined by the company and underwriters. Investors are not allowed to bid below this floor price, ensuring a baseline for the valuation of the shares.
7. 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.
If you are interested in understanding more about IPO lot size and how companies arrive at the lot size, please read this article.
8. Issue price
The issue price in an IPO is the final price at which the shares are allocated to investors after the completion of the book-building process. It is determined based on the bids received from investors at different price points during the bidding period.
The company, in consultation with the underwriters, analyzes the demand for shares and sets the issue price.
9. 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.
10. 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.
Also Read : Explanation of Book Building Vs Fixed Pricing
11. 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.
Read out detailed explanation about ASBA process here.
12. 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.
13. 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.
14. 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.
If you want to know more about various categories of Investors in an IPO. please read this post.
Also Read : How to Apply for an IPO in Minor’s name – Benefits and Tax Implications
15. 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.
16. 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.
Check this post about IPO Oversubscription where we have explained about why Oversubscription happens and what is its effect on share price of the IPO Issue.
17. 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.
You can also check this post about IPO Undersubscription and how company handles undersubscription.
18. Listing Price
The IPO listing price is the initial value at which shares of a newly public company are traded on the stock exchange. It is determined by market forces, reflecting the demand and supply dynamics of the stock during the early trading hours.
19. Face Value
In an IPO, face value refers to the nominal or original value of a share, typically set by the issuing company. It is a fixed amount, and the issue price may be above or below this face value.
Investors use face value as a reference point, but the market price is determined by factors such as demand, supply, and the company’s performance.
20. Lock-in Period
The lock-in period in an IPO is a designated timeframe during which certain shareholders, often company insiders or promoters, are restricted from selling their allocated shares in the open market.
This measure is implemented to ensure stability and prevent abrupt sell-offs right after the IPO listing, contributing to a more controlled and balanced market debut.
If you are interested why the lock-in period is important and duration for each investors – read this post
Final Thoughts
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.
Read Our Other IPO Related Articles:
- What is Roadshow in IPO and What is its Purpose?
- 7 Key Differences Between IPO and OFS
- What is a Deemed Prospectus in IPO?
- 11 Common IPO Mistakes and How to Avoid them
- What Is Cut-Off Price in IPOs – Why is it Important?
- What is IPO Listing Gain? – Factors Influencing Listing Gain
- What is Lock-In Period in IPO? Benefits and Drawbacks
- What is Market Lot Size and Minimum Order Quantity in IPO?
- Syndicate Member: Role in IPO, Types and Syndication Risk
- What is a Shelf Prospectus, Criteria and How Can it Benefit an Investor?
- What is ASBA in IPO? Benefits & Application Process
- What Is the IPO Cycle In Stock Market?
- Price Band in IPOs: How It is decided?
- Who are Qualified Institutional Buyers (QIBs)?
- 15 Step Guide on How to Analyse an IPO