Popular Terminologies Around IPO
Initial Public Offerings (IPOs) are significant events in the financial world, as they mark the transition of a company from private to public ownership. For investors, understanding the key terminologies associated with IPOs is essential for making informed decisions. Here’s a comprehensive list of popular IPO-related terms and their meanings:
1. Initial Public Offering (IPO)
An IPO is the process through which a private company offers its shares to the public for the first time to raise capital. It is often referred to as “going public.”
2. Underwriter
An underwriter is a financial institution or investment bank that manages the IPO process. They assist in determining the issue price, marketing the shares, and ensuring the IPO is fully subscribed.
3. Issue Price
The price at which shares are offered to the public during the IPO. It may be fixed or fall within a price band.
4. Price Band
In a book-building IPO, the company provides a range of prices (e.g., ₹100–₹120) within which investors can bid for shares.
5. Book-Building Process
A method of price discovery during an IPO where investors bid for shares within a specified price band. The final price is determined based on demand and the bids received.
6. Fixed Price Issue
In this type of IPO, the company sets a specific price at which shares will be offered to investors, with no bidding process.
7. Lot Size
The minimum number of shares that an investor must apply for in an IPO. For instance, if the lot size is 50 shares, investors must bid for multiples of 50.
8. Face Value (Nominal Value)
The original value of a share set by the company during its incorporation, often used for accounting purposes (e.g., ₹10 per share).
9. Premium
The difference between the issue price and the face value of a share. If the face value is ₹10 and the issue price is ₹100, the premium is ₹90.
10. Offer Size
The total value of shares offered in the IPO, calculated as the issue price multiplied by the number of shares.
11. Draft Red Herring Prospectus (DRHP)
A preliminary document submitted to the regulator (e.g., SEBI in India) that contains details about the company, its financials, risks, and plans for the IPO.
12. Red Herring Prospectus (RHP)
The final version of the DRHP, including details such as the price band, IPO dates, and the allocation of shares.
13. Greenshoe Option
An over-allotment option allowing underwriters to sell additional shares (up to 15%) if there is high demand for the IPO.
14. Anchor Investor
Institutional investors invited to invest in the IPO before it opens to the public. Their participation boosts market confidence.
15. Qualified Institutional Buyer (QIB)
Large institutional investors such as mutual funds, banks, and insurance companies that are eligible to invest in IPOs under regulatory guidelines.
16. High Net Worth Individual (HNI)
Individuals who invest in IPOs above a certain threshold, typically applying for shares worth more than ₹2 lakh in India.
17. Retail Individual Investor (RII)
An individual investor who applies for shares worth up to ₹2 lakh in an IPO. A specific portion of shares is reserved for RIIs.
18. Allotment
The process by which shares are distributed to investors after the IPO subscription closes. Allotment is based on demand and the category of investors.
19. Oversubscription
When the demand for shares exceeds the number of shares offered in the IPO. In such cases, shares are allotted on a proportionate or lottery basis.
20. Listing
The process of a company’s shares being traded on a stock exchange for the first time after the IPO.
21. Listing Gains
The profit earned by investors if the stock price on the listing day is higher than the IPO issue price.
22. Lock-In Period
A period during which certain investors, such as promoters or anchor investors, are restricted from selling their shares post-listing.
23. Grey Market
An unofficial market where IPO shares are traded before they are officially listed on the stock exchange.
24. Grey Market Premium (GMP)
The price at which IPO shares are traded in the grey market. A high GMP indicates strong investor interest.
25. Floor Price and Cap Price
- Floor Price: The minimum price in the IPO price band.
- Cap Price: The maximum price in the IPO price band.
26. Basis of Allotment
A document issued by the company detailing how shares were allocated to investors across different categories.
27. Cut-Off Price
The final price at which shares are allotted in a book-building IPO. Retail investors can opt for the cut-off price, agreeing to pay the price determined by the company.
28. Bid Lot
The minimum number of shares an investor can bid for in an IPO. It is specified in the IPO prospectus.
29. Post-Issue Paid-Up Capital
The total share capital of the company after the IPO, reflecting the new shares issued.
30. IPO Proceeds
The funds raised by the company from the IPO. These proceeds are used for various purposes like debt repayment, business expansion, or general corporate expenses.
31. Sweat Equity
Shares issued to employees or promoters at a discount or for non-cash consideration as a reward for their contribution to the company.
Conclusion
Understanding IPO-related terminologies is crucial for navigating the complexities of the IPO process. These terms provide clarity on the roles, mechanisms, and outcomes of IPOs, helping investors make informed decisions and maximize their investment potential. Whether you are a retail investor or an institutional player, familiarizing yourself with these terms can enhance your participation in IPOs.
