2020 was a blockbuster year for IPOs and it won’t just stop there. Nifty making a fresh record high at 14000 on 31st December ’20 indicates investors’ confidence in the economic recovery of India. This is the reason why we feel that this IPO mania will continue with upcoming IPOs like IRFCL, Kalyan Jewellers, Grofers, Zomato, etc. in 2021. The Indian IPO market is witnessing large participation from investors and I am sure you would be interested in applying for some upcoming IPOs too. Hence, we are here to simplify some of the key terms related to IPOs which a smart investor should be aware of. So, let’s dive right into it!
1.Fresh Issue vs Offer for Sale
A Fresh issue is when a company offers its shares for the first time to the public. The company intends to raise funds for its business by offering new shares and getting listed on stock exchanges. In the case of an Offer for sale, existing promoters/shareholders sell their stake in an already listed company to the public. Here, no new shares are created. The raised funds go to the promoters who are selling their stakes and not the company.
Abridged means shortened. And a prospectus is a legal document including details about the company, its business model, and its financial statements. Now both the words put together -Abridged prospectus means a shorter version of the prospectus. A prospectus is extensively detailed whereas an abridged prospectus is the summary of a prospectus. This helps investors to save time and make a well-informed decision without missing out on any important details from the prospectus.
3.Draft Red Herring Prospectus (DRHP)
A DRHP is a document submitted by the underwriter on the issuer company’s behalf to SEBI. This document involves details about the company’s management personnel, shareholding pattern, financial statements, reasons to raise money & how it will be used in the future. SEBI reviews the prospectus and requests changes ensuring adequate disclosure. The general public can also submit their comments to SEBI during this period. You can find DRHP on the company’s website, the underwriter’s website, the stock exchange’s website, or SEBI’s website.
4.Red Herring Prospectus
Once the DRHP approved by SEBI is filed by the company with the Registrar of Companies (ROC) this document becomes Red Herring Prospectus. This document will not include the number of shares offered, price, or amount of issue if the issue happens via a book-building process. Hence, a price band for bids is mentioned in the document.
A Price band is a range within which an issuer company is offering its shares to the public. It is jointly decided by the company and the underwriter. Say, if Company Z going public sets a price band of Rs. 100 – 110, then an investor cannot bid below Rs. 100 and above Rs 110. The lower price of the price band is called the Floor Price (here in our e.g.: Rs 100) whereas the higher price of the price band is called the Cap (here in our e.g.: Rs 110)
6.Book Building Process
The book Building process helps a company determine the price at which their shares will be offered to the public. Here, investors interested in the issue, place their bids between the specified price band. The bidding is usually open for 3-7 business days. After the bidding process is complete, the underwriter will arrive at a cut-off price based on the bids received.
The issue price is the price at which the issuer company sells its shares to the public. It is also known as the Offer price. The underwriter determines this price based on the amount the company wants to raise and the demand from investors.
8.Minimum Subscription This is the minimum percentage of IPO shares that retail investors need to subscribe for an IPO to go through. SEBI mandates that every company needs at least a 90% subscription. If not, then the IPO would be a failure and the company must refund the money received in the bidding process.
An IPO is said to be oversubscribed when the number of applications received for shares is more than the number of shares being offered by the company. Here, the demand for a company’s shares is more than its supply. This happens when investors' confidence in the issuer company’s growth is high.
An IPO is said to be undersubscribed when the number of applications received for shares is less than the number of shares being offered by the company. Here, demand for a company’s shares is less than its supply. This could happen if an IPO is highly-priced, poor marketing, or unfavourable market conditions.
11.Listing DateThis is the date on which the shares of the issuer company are listed on the stock exchanges. Investors who did not receive any allotment in the IPO process can still buy the shares from the secondary market after it gets listed.