An Initial Public Offer (IPO) is a means of raising funds from the market. The investors who apply and get allotted shares of the IPO become shareholders (part owners) of the company. Here are some key FAQs pertaining to the IPOs
What is full form of IPO?
The IPO full form is Initial Public Offering (IPO). As the name suggests, it means the company approaching the market to raise fresh funds or to list in the share markets.
Is the IPO full form in banking and IPO full form in market the same?
Yes it is one and the same. It is Initial Public Offer in both the cases. You normal apply for IPO through the banker to the IPO whereas after listing the IPO is traded in the share market.
What is the primary market and the secondary market
When the IPO hits the market, and opens for subscription it is referred to as the primary market. As the name suggests, primary market is the initial market. Once the IPO shares are listed then they will trade in the secondary markets.
Who is eligible to apply for an IPO?
Any adult who is competent to enter into a legal contract can apply for IPOs. It is necessary to have a demat account for investing in IPOs because nowadays all allotments are done only in demat form.
Do I also require a trading account for investing in IPOs?
Technically, you do not require a trading account for applying to an IPO. Demat account (Demat account full form is a dematerialized account) alone will suffice. However, if you need to sell the shares post listing then you do require a trading account. Also, if you want to apply for the IPO online, then it is much easier to log in your application through your online trading account.
What is the difference between a Fixed Price and a Book Built IPO?
Fixed priced IPO is one in which the issue price is fixed. It is normally the par value plus a premium. In a book built issue, the price is discovered by bidding and the final price is decided based on the level where there is maximum demand. The issuer only defines a price range in case of a book built issue.
As an investor in an IPO, how do I know which price to apply at?
There are 2 things you need to understand here. You need to bid at a price that is within the range. All bids that are below the price range will be rejected. Suppose the range is Rs.430-460. If you have bid at Rs.450 and the final discovered price is Rs.460/- then your bid will be rejected. The easier option is to just bid at cut-off wherein you accept to take the IPO at whatever price is finally discovered
Who decides the size of the issue and the book building price range?
The company that is coming out with the IPO will decide the size of the issue based on how much funds it will require. The investment banker (BRLM) will advise the company on the ideal price range based on valuations and appetite from retail and institutional investors.
What does the BRLM do and is that the same as the registrar?
BRLM and registrar are different. Book running lead manager (BRLM) is the issue manager and will be responsible for the entire chain from setting the price to marketing the issue to doing road shows and also completing all the formalities with the exchanges and SEBI. The registrar maintains a record of shareholders, allots shares to them, looks after their corporate actions etc. Companies like Karvy and In-Time are examples of registrars.
For how many days is the IPO kept open?
Typically, the company will keep the IPO open for a period of 3-4 days to enable investors to apply in the IPO. All valid applications will have to be logged into the system before the close of trading on the last day.
What is the process after the IPO is closed?
The normal process is to finalize the basis of allotment and then allot the shares within a span of 10-12 days and then the company is listed on the stock exchanges. There is a popular ceremony called the “Ringing the Bell” ceremony which is done by the promoter of the company to declare the company ready for trading on the secondary markets.
On what basis is the shares allotted?
There are 3 categories of investors in an IPO. The retail investors (who invest less than Rs.2 lakhs) are allotted in such a way that as many investors as possible get the bare minimum allotment so as too widen the equity base. The HNI category gets allotments on proportionate basis depending on the oversubscription. The institutional category gets shares allotted on a discretionary basis.
That means my funds will locked in once I apply for the shares, is that correct?
That is where ASBA (Applications Supported by Blocked Amounts) comes in handy for retail investors. The amount is only blocked in your designated bank account and you continue to earn interest. On the date of allotment, the account is debited only to the extent of the shares allotted to you and the block is removed on you account. So, there is no notional loss for you.
How do shares list at a premium / discount to the issue price?
That is entirely market driven. A variety of factors will go into the listing price viz. valuations of the company, how it compares with peer group, profitability of the company, demand post listing, quality of anchor investors etc.