Investing in an Initial Public Offering (IPO) is a multifaceted process and all the investment documents are loaded with technical jargon. There are multiple risk factors involved in an IPO investment. Thus, it is recommended to familiarize oneself with the technicalities of an IPO through research. To facilitate this research we have mentioned some of the most commonly used terms in an IPO.
Read ahead to find out what they mean.
Abridged prospectus: The abridged prospectus of an IPO is the summary of all of its important details as specified by SEBI. The Companies Act of 1956 mandated all IPO application forms to be supplemented by an abridged prospectus. The abridged prospectus should not be confused with the ‘Red herring prospectus’ which is a preliminary registration document prepared by the company.
ASBA: Action Supported by Blocked Account (ASBA) is a mechanism developed by SEBI which ensures that the investor’s money is blocked in his/her account until the shares are allotted to him/her. It is meant to secure the investors’ interests by providing an alternative to the time-taking procedure involving refunds that was practiced earlier.
Draft Herring Prospectus: A Draft Red Herring Prospectus (DRHP) is a registration document that contains information about the company’s finances, promoters, listed & unlisted peers, etc. At least 21 days before the official launch of its IPO, a company is required to submit a draft prospectus to SEBI. During this period the board reviews and suggests changes to the company. Additionally, the prospectus is also open to the scrutiny of the common masses.
Book Building Process: When a company chooses to launch its IPO through the book-building method, it follows the book-building process. In this process, securities are not valued at a fixed price but a price band is issued within which the investors can bid to decide the IPO’s offer price.
Offer date & Listing date: It is the opening date of an IPO starting when the investors can bid for shares. In other words, interested buyers can start applying for a particular IPO from its offer date. On the other hand, once the shares are allotted, stocks of the company are listed on the stock exchange for trading. The date on which they are listed is known as the listing date.
Lot Size: Lot size is the minimum number of shares that one can bid/apply for in an IPO. If one wants to bid for more than the minimum number of shares he/she has to do it in the multiples of the lot size. For example: The lot size of the Zomato IPO was set at 195. So, investors could bid for shares in multiples of 195 like, 195, 195 x 2= 390, 195 x 3= 585, etc.
Floor price: It is the lowest price at which one can bid for an IPO. In the case of the book-building method when a price band is set, the lower limit of the price band is the floor price. For instance: The price band for the Zomato IPO was fixed at ₹72-76 per share. This means that ₹72 was the floor price for this particular IPO.
Cut off price: It is the price at which shares are allotted to retail investors in an IPO. It is decided on the basis of how much price most investors are willing to pay for a share. If one bids above the cut-off price he/she will be allotted the shares and the extra amount will be refunded. If he/she bids below the cutoff price, shares will not be allotted to him/her.
Underwriter: An underwriter is an intermediary, generally an investment bank that provides the guarantee of selling a minimum number of shares to the company releasing an IPO. An underwriter plays various roles such as marketing the IPO, allotting shares, etc. In case the underwriter fails to sell the guaranteed number of shares, it is liable to buy the said shares itself.
IPO investment can seem to be a daunting process as the terminologies tend to drown one in their complexities. Once you are armed with the knowledge of the details and salient features of an IPO, the road ahead can be quite smooth.