- Date : 18/08/2021
- Read: 7 mins
In 2020 and so far in 2021, we have seen many companies come out with IPOs. Investors have made very good returns in these IPOs. However, before applying for an IPO, an investor needs to understand the terminology. In this article, we discuss the various IPO terminologies so that investors can make an informed decision before applying.
Since the beginning of 2021, we have already seen 30+ companies raising funds through the IPO route. There are many more lined up during the remaining part of the year. Most of these companies that debuted on Dalal Street in 2021 have listed at a hefty premium to their issue price. Many investors are enthused with the listing gains, and more and more people are applying for IPOs.
In this article, we will take a look at the IPO-related terminologies that one should know to make an informed decision while applying for IPOs.
Recently, food delivery app Zomato came out with an IPO. It was one of the most awaited IPOs and hence got a very good response from investors. On listing, Zomato returned the favour by listing at a huge premium and rewarding investors with handsome gains.
Listing gains of some recent IPOs
Note: The listing price is of the BSE.
We will use the example of Zomato to understand these IPO-related terminologies.
1) IPO (Initial Public Offering)
An IPO is a process through which a private company with few shareholders offers its shares to the public for the first time and gets listed on the stock exchange. Through the IPO, the private company becomes a publicly traded company. New investors who apply for shares in the IPO get allotment to become shareholders or stakeholders in the company.
A company may go for an IPO to:
- Raise money for its growth
- Provide an exit option to its existing investors, in which case the money goes to the existing shareholders and not the company
- Both of the above
Zomato came out with an IPO that raised Rs 9375 crore. Of this, Rs 9000 crore went to the company for its growth initiatives and meeting general corporate purposes. To meet this objective, the company issued new shares, known as a fresh issue. The remaining Rs 375 crore went to Zomato’s existing shareholders, who sold their shares through the IPO. This is known as an offer for sale.
Related: How IPOs differ from NFOs?
2) IPO opening and closing date
As an investor, you can apply for shares of a company during the IPO only on specific dates as declared by the company. Usually, the subscription is open for three working days. The day on which the subscription starts is known as the IPO opening date, and the day on which the subscription closes is known as the IPO closing date. In the case of the Zomato IPO, the IPO opening date was 14 July 2021, and the IPO closing date was 16 July 2021.
3) IPO price band
The company declares a price range, known as price band, within which you can apply for the shares. For example, the Zomato IPO has a price band of Rs 72 to Rs 76 per equity share. In this case, Rs 72 is the lower end and Rs 76 the upper end of the price band. If there is heavy demand for shares, a company may choose to issue shares at the upper end of the price band.
If you are not sure of the price you wish to apply at, you can choose the cut-off option. In this scenario, your application is considered at whatever price the company chooses to issue the shares. In the case of Zomato, as there was very heavy demand for the shares, the company choose to issue the shares at the upper end of the price band (Rs 76). For investors who chose the cut-off option, their IPO application was considered at Rs 76.
4) Market lot
While applying for an IPO, you have to apply for a minimum number of shares. It is known as a market lot or lot size. You have to apply for a minimum of 1 market lot and in multiples. In Zomato’s case, the market lot was 195 shares (Rs 14,820). The maximum number of lots a retail investor could apply for was 13 (Rs 1,92,660). A retail investor can make a maximum application of Rs 2 lakh.
When a company gets bids for more shares than on offer in the IPO, it is known as oversubscription. For example, the Zomato IPO overall size was 71.92 crore (QIB quota - 75%, NII quota - 15%, and retail investors quota - 10%). But there was heavy demand for the shares. The company got bids for 2,751.25 crore and the issue got oversubscribed by a huge 38.25 times.
Once the subscription period closes, over the next few days, the allotments are finalised. For the applicants who are allotted the shares, their bank account is debited for the subscription amount and their demat account is credited with the shares.
6) Minimum subscription
Minimum subscription is the minimum percentage of IPO shares that investors need to subscribe to for the IPO to go through. As per SEBI rules, the current minimum subscription is 90%. For example, if a company is offering 100 shares through the IPO, it should get a minimum subscription for at least 90 shares for the IPO to go through.
7) Listing on stock markets
Once the allotments and refunds are done, the company is ready to list. Most companies list on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Zomato shares are listed on both. However, in some cases, a company may choose to list on only one of the two exchanges. For example, BSE Limited shares are listed only on NSE.
8) Listing day
Once the allotments are finalised, the company fixes the listing date. On the listing day, the shares start to trade on the stock exchanges (NSE and BSE). The Zomato shares got listed on 23 July 2021. The shares opened for trading on the BSE at Rs 115, a premium of Rs 39 (51%) against the issue price of Rs 76. The share hit a high of Rs 138 and closed the day at Rs 126.
9) Application Supported by Blocked Amount (ASBA)
While applying for shares in an IPO, the ASBA process is followed. In this process, once you submit your bid for a specific number of market lot/s, the equivalent amount is blocked in your bank account. Once the shares are allotted to you, the proportionate amount is debited from your bank account, and the remaining amount is unblocked. If there is no allotment to you, the entire amount is unblocked.
10) Draft Red Herring Prospectus (DRHP)
Every company planning to come out with an IPO has to compile all important information related to the business and submit it to SEBI for approval. This document, known as DRHP, gives you all the information about the IPO-bound company: the nature of its business, the promoters, the company’s strengths, weaknesses, risks, etc. A company can go ahead with the IPO only after SEBI approves the DRHP.
11) Abridged prospectus
An abridged prospectus is a condensed version of the main prospectus. It will contain all the salient features of the main prospectus.
Every IPO has a certain percentage of shares reserved for various categories of investors. For example, the Zomato IPO had 10% shares reserved for retail investors (RIs), 75% for qualified institutional bidders (QIBs), and 15% for non-institutional investors (NIIs). A retail investor is one who can make a bid of up to Rs 2 lakh.
Zomato IPO information at a glance
The above section discussed the various IPO terminologies and used the Zomato IPO as an example. Here’s all the information related to the Zomato IPO at a glance.
Image: Zomato IPO information
So far, we discussed some key IPO terminologies. This should help you make an informed decision while applying for an IPO. Now that you are ready to apply for an IPO, let us see which ones you can apply for.
Upcoming IPOs in India
A lot of IPOs are expected to come up in 2021. Here are some of them:
Now that you are aware of the IPO terminologies and have a handy list of upcoming IPOs, you are all set to invest in them and profit from them!