1. What is an IPO?
IPO or Initial Public Offer is a way for a company to raise money from investors for its future projects and get listed to Stock Exchange. Or An Initial Public Offer (IPO) is the selling of securities to the public in the primary stock market. Company raising money through IPO is also called as company ‘going public'.
From an investor point of view, IPO gives a chance to buy shares of a company, directly from the company at the price of their choice (In book build IPO's). Many a times there is a big difference between the price at which companies decides for its shares and the price on which investor are willing to buy share and that gives a good listing gain for shares allocated to the investor in IPO.
From a company prospective, IPO help them to identify their real value which is decided by millions of investor once their shares are listed in stock exchanges. IPO's also provide funds for their future growth or for paying their previous borrowings.
2. Who decides the Price Band?
Company with help of lead managers (merchant bankers or syndicate members) decides the price or price band of an IPO.SEBI, the regulatory authority in India or Stock Exchanges do not play any role in fixing the price of a public issue. SEBI just validate the content of the IPO prospectus.
Companies and lead managers do lots of market research and road shows before they decide the appropriate price for the IPO. Companies carry a high risk of IPO failure if they ask for higher premium. Many a time investors do not like the company or the issue price and doesn't apply for it, resulting unsubscribe or undersubscribed issue. In this case companies' either revises the issue price or suspends the IPO.
3. Who decides the date of the issue?
Once ‘Draft Prospectus' of an IPO is cleared by SEBI and approved by Stock Exchanges then it's up to company going public to finalize the date and duration of an IPO. Company consult with the Lead Managers, Registrar of the issue and Stock Exchanges before decides the date.
4. What is the role of registrar of an IPO?
Registrar of a public issue is a prime body in processing IPO's. They are independent financial institution registered with SEBI and stock exchanges. They are appointed by the company going public.
Responsibility of a registrar for an IPO is mainly involves processing of IPO applications, allocate shares to applicants based on SEBI guidelines, process refunds through ECS or cheque and transfer allocated shares to investors Demat accounts.
5. What is the role of Lead Managers in an IPO?
Lead managers are independent financial institution appointed by the company going public. Companies appoint more then one lead manager to manage big IPO's. They are known as Book Running Lead Manager and Co Book Running Lead Managers.
Their main responsibilities are to initiate the IPO processing, help company in road shows, creating draft offer document and get it approve by SEBI and stock exchanges and helping company to list shares at stock market.
6. What is Rights Issue or RI?
Rights Issue (RI) is an issue of shares of an already listed company to existing share holders.
7. What is primary & secondary market?
Primary market is the market where shares are offered to investors by the issuer company to raise their capital.
Secondary market is the market where stocks are traded after they are initially offered to the investor in primary market (IPO's etc.) and get listed to stock exchange. Secondary market comprises of equity markets and the debt markets.
Secondary market is a platform to trade listed equities, while Primary market is the way for companies to enter in to secondary market.
8. What is the life cycle of an IPO prospectus?
Stage 1: Draft Offer document
"Draft Offer document" is prepared by Issuer Company and the Book Building Lead Manager of the public issue. This document is submitted to SEBI for review. After reviewing this document either SEBI ask lead managers to make changes to it or approve it to go ahead with IPO processing.
"Draft Offer document" is usually a PDF file having information of an investor who needs to know about the public issue. It mainly contain information about the company, its business, management, risk involve in applying to this issue, company financials and the reason why company is raising money through IPO.
Stage 2: Offer Document
Once the ‘Draft Offer document' cleared by SEBI, it becomes "Offer Document". Offer Document is the modified version of ‘Draft Offer document' with SEBI suggestions."Offer Document" is submitted to the registrar of the issue and stock exchanges where Issuer Company is willing to list.
Stage 3: Red Herring Prospectus
Once "Offer Document" gets clearance from Stock Exchanges, Issuer Company add Issue size and price of the issue to the document and make it available to the public. The issue prospectus is now called "Red Herring Prospectus".
9. What is the life cycle of an IPO?
Below is the detail process flow of a 100% Book Building Initial Public Offer IPO. This process flow is just for easy understanding for retail IPO investors. The steps provided below are most general steps involve in the life cycle of an IPO. Real processing steps are more complicated and may be different. Please visit SEBI website, stock exchange website or consult an expert for most current information about IPO life cycle in Indian Stock market.
A. Issuer Company - IPO Process Initialization
1. Appoint lead manager as book runner.
2. Appoint registrar of the issue.
3. Appoint syndicate members
B. Lead Manager's - Pre Issue Role - Part 1
1. Prepare draft offer prospectus document for IPO.
2. File draft offer prospectus with SEBI.
3. Road shows for the IPO.
C. SEBI – Prospectus Review
1. SEBI review draft offer prospectus.
2. Revert it back to Lead Manager if need clarification or changes (Step 2).
3. SEBI approve the draft offer prospectus, the draft offer prospectus is now become Offer Prospectus.
D. Lead Manager - Pre Issue Role - Part 2
1. Submit the Offer Prospectus to Stock Exchanges, registrar of the issue and get it approved.
2. Decide the issue date & issue price band with the help of Issuer Company.
3. Modify Offer Prospectus with date and price band. Document is now called Red Herring Prospectus.
4. Red Herring Prospectus & IPO Application Forms are printed and posted to syndicate members; through which they are distributed to investors.
E. Investor – Bidding for the public issue
1. Public Issue Open for investors bidding.
2. Investors fill the application forms and place orders to the syndicate members (syndicate member list is published on the application form).
3. Syndicate members provide the bidding information to BSE/NSE electronically and bidding status gets updated on BSE/NSE websites.
4. Syndicate members send all the physically filled forms and cheques to the registrar of the issue.
5. Investor can revise the bidding by filling a form and submitting it to Syndicate member.
6. Syndicate members keep updating stock exchange with the latest data.
7. Public Issue Closes for investors bidding.
F. Lead Manager – Price Fixing
1. Based on the bids received, lead managers evaluate the final issue price.
2. Lead managers update the 'Red Herring Prospectus' with the final issue price and send it to SEBI and Stock Exchanges.
G. Registrar - Processing IPO Applications
1. Registrar receives all application forms & cheques from Syndicate members.
2. They feed applicant data & additional bidding information on computer systems.
3. Send the cheques for clearance.
4. Find all bogus application.
5. Finalize the pattern for share allotment based on all valid bid received.
6. Prepare 'Basis of Allotment'.
7. Transfer shares in the demat account of investors.
8. Refund the remaining money though ECS or Cheques.
H. Lead manager – Stock Listing
1. Once all allocated shares are transferred in investors dp accounts, Lead Manager with the help of Stock Exchange decides Issue Listing Date.
2. Finally share of the issuer company gets listed in Stock Market.
10. What is the difference between Book Building Issue and Fixed Price Issue?
Initial Public Offering can be made through the fixed price method, book building method or a combination of both.
Difference between shares offered through book building and offer of shares through normal public issue (Source: BSE):
Fixed Price Process
Book Building process
Price at which the securities are offered/ allotted is known in advance to the investor
Price at which securities will be offered/ allotted is not known in advance to the investor. Only an indicative price range is known.
Demand for the securities offered is known only after the closure of the issue.
Demand for the securities offered can be known everyday as the book is built.
Payment if made at the time of subscription wherein refund is given after allocation.
Payment only after allocation
11. What is the difference between Floor Price and Cut-Off Price for a Book Building Issue?
Company coming up with Book Building Public Issue decided a price band for the issue. The price band usually contains an upper level and a lower level. Floor Price is the minimum price (lower level) at which bids can be made for an IPO.Investors can bid for the Book Build IPO at any price in the price band decided by the company. In Book Build process retail investors have an addition option to choose "Cut-Off" price for bidding.
Cut-off price means the investor is ready to pay whatever price is decided by the company at the end of the book building process. Retail investor has to pay the highest price while placing the bid at Cut-Off price. If company decides the final price lower then the highest price asked for IPO, the remaining amount is return to the retail investor.
12. What is the difference between retail investor, Non-institutional bidders and Qualified Institutional Bidders (QIB’s)?
Investors can apply for shares in an IPO in 4 different categories :
1. Retail Individual Investor (RII)
In retail individual investor category, investors can not apply for more then Rs one lakh (Rs 1,00,000) in an IPO. Retail Individual investors have an allocation of 35% of shares of the total issue size in Book Build IPO's. NRI's who apply with less then Rs 1,00,000 /- are also considered as RII category.
2. High Networth Individual (HNI)
If retail investor applies more then Rs 1,00,000 /- of shares in an IPO, they are considered as HNI.
3. Non-institutional bidders
Individual investors, NRI's, companies, trusts etc who bid for more then Rs 1 lakhs are known as Non-institutional bidders. They need not to register with SEBI like RII's. Non-institutional bidders have an allocation of 15% of shares of the total issue size in Book Build IPO's.
4. Qualified Institutional Bidders (QIB's)
Financial Institutions, Banks, FII's and Mutual Funds who are registered with SEBI are called QIB's. They usually apply in very high quantities. QIBs are mostly representatives of small investors who invest through mutual funds, ULIP schemes of insurance companies and pension schemes.QIB's have an allocation of 50% of shares of the total issue size in Book Build IPO's.
In a book built issue allocation to Retail Individual Investors (RIIs), Non Institutional Investors (NIIs) and Qualified Institutional Buyers (QIBs) is in the ratio of 35:15: 50 respectively.
QIB's are prohibited by SEBI guidelines to withdraw their bids after the close of the IPOs. Retail and non-institutional bidders are permitted to withdraw their bids until the day of allotment.
13. As a retail investor I want to apply more then Rs 1 lakhs in an IPO. Can I invest in Non-institutional bidder’s category? If yes then what are advantages or disadvantages of this?
Yes, a retail individual investor can bid for more then Rs 1 Lakhs in an IPO by applying in 'Non Institutional Investors' category. There is no upper limit for bidding amount in 'Non Institutional Investors' category.
You can apply for more then Rs 1 Lakhs and may get much better allocation then a retail bidder.
Non-institutional bidders have an allocation of 15% of shares of the total issue size in Book Build IPO's, while retail Individual investors has 35% (remaining 50% is for QIB's). As Non-institutional category has much smaller in size, issue usually oversubscribed much higher (then in retail category) and less shares allocation.
14. Is it mandatory to have PAN number to apply in an IPO?
Yes, Since July 2006, SEBI made PAN number mandatory for IPO applicants. Forms submitted without PAN number or wrong PAN numbers are considered as faulty application and they are not considered for IPO allotment.
It's highly recommended that you double check your PAN number information before submitting the IPO application form. If you are filling the IPO application through online stock broker, make sure he has correct information.
15. How many days is the issue open?
As per Clause 8.8.1, Subscription list for public issues shall be kept open for at least 3 working days and not more than 10 working days. In case of Book built issues, the minimum and maximum period for which bidding will be open is 3 - 7 working days extendable by 3 days in case of a revision in the price band. The public issue made by an infrastructure company, satisfying the requirements in Clause 2.4.1 (iii) of Chapter II may be kept open for a maximum period of 21 working days. As per clause 8.8.2., Rights issues shall be kept open for at least 30 days and not more than 60 days.
16. What information should I keep after I submit the IPO application form?
This is a very important question for all IPO investors. If you are applying for an IPO, make sure you retain following information for future correspondence with the company or registrar of the issue.
1. Application form photo copy 2. Cheque photo copy 3. Application number in case of online IPO submission
17. What is 'Market Lot Size' and 'Minimum Order Quantity' for an IPO?
IPO 'Market Lot' and 'Minimum Order Quantity' are two important factors investor should know while bidding for an IPO.Minimum Order Quantity, as name says, is the minimum number of shares investor can apply while bidding in an IPO. If investor wants to bid for more shares, they can apply in multiples of IPO market lot (lot Size or IPO bid lot) of shares.Usually (Market Lot * Lower side of the issue price) values around Rs 5500/- to Rs 6000/-.
18. Does applying in an IPO guarantee me to get certain amount of shares?
No, applying for shares in an IPO or actually bidding for shares in an IPO doesn't give any guarantee to get the shares. As it's a bidding process, allotment depend on number of bids received in different categories, the price at which investor applied for shares etc.
Once IPO closes, registrar of the issue collect all the bidding information and prepares a ‘Basis of Allotment'. This document provides information about the bids received by verity of investors at different prices and the pattern of allotment.
19. Investing in IPO’s is much less riskier then directly investing in stock market. Is that true?
Not really. But IPO's are excellent way to enter in to some stocks. Not all the IPO's give good returns.
Few risks involve in applying in IPO's are:
1. Stock list at lower then issue price. 2. Issue oversubscribed heavily and investor doesn't get allotment. 3. Any mishandling in processing refund could delay in getting the money back for shares not allocated.
20. Can I apply in an IPO through multiple applications on same name?
No, one person cannot apply multiple times through multiple applications for an IPO. It's a rule and if you apply in an IPO though multiple applications with same name or same demat account or same PAN Number, all of your application will be rejected.
If you would like to place order for multiple application, it works if you apply one each of your family member's name. But again all eligible family members should have a demat account and a PAN number.
21. How many days is the issue open?
Book Building IPO remains open for 3 to 7 days and may extend for another 3 days in case of revision in price if issue remain unsubscribe in initially decided days. Number of days issue remain open is decided by the issuer company and its issue lead manager.Right issues remain open for minimum 30 day and no longer then 60 days
22. What is Basis of Allocation or Basis of Allotment?
Basis of Allotment or Basis of Allocation is a document publishes by registrar of an IPO to stock exchanges and IPO investors. This document provides information about final price fixed for an IPO, issue subscription (bidding) information or demand of an IPO and share allocation ratio.
The IPO allotment information is categorized by number of shares applied by an applicant. For each such category detail bidding information is provided in this document including number of valid application received, total number of share applied, ratio of the allotment and number of shares allocated to the applicants.
Ratio of the allotment is a critical field for IPO's oversubscribed multiple times. This field tells how many applicants will receive single lot of shares among a certain number of applicants. For example, ratio 1:8 means only one out of eight applicant received one lot of shares; ratio value 'FIRM' means all the applicants are eligible to receive certain amount of share.
23. Can I revise or cancel my IPO application?
Book Building IPO: Yes an investor can revise bided quantity and price of an already applied Book Building IPO anytime if the issue is still open for subscription. Investor has to fill a revision form and give it to the syndicate member.
24. Where do I get an IPO application form?
Investor can get the IPO Application Forms from:
1. Nearest stock broker office or
2. From the syndicate member office of an IPO. Syndicate members are usually banks or other financial institutions (i.e. SBI). List of syndicate members of an IPO are published in IPO Prospectus.
IPO application forms are available for free. Filled application can be submitted to any stock broker office or syndicate member office.
25. Can a minor apply in IPO?
Some companies allow minors to bid for their IPO and other doesn't. So it depends on IPO to IPO. Investor has to disclose age of the applicant in IPO Application Form.
26. Tips to choose right IPO for investment.
Checklist for banking on the right IPO.
- 1. The issue size has to be big, the bigger the issue, the higher is the capability of the promoters.
- 2. Money begets more money, so if they have raised more money, be sure, they will be able to earn more.
- 3. A higher promoters stake is a must, instills a sense of responsibility.
- 4. A background check on the promoters capabilities
- 5. Size of projects in the pipeline, will indicate the scalability of the company
- 6. Last but not the least, in big companies; look for long term wealth creation and not speculative gains.
27. Can a person apply in the non-institutional bidder category of an IPO?
Yes an individual investor can apply in Non Institutional Investors category of an IPO. "Individual investors, NRI's, companies, trusts etc who bid for more then Rs 1 lakhs are known as Non-institutional bidders. They need not to register with SEBI like RII's. Non-institutional bidders have an allocation of 15% of shares of the total issue size in Book Build IPO's."
There are few advantages and disadvantages for retail investor to apply under non-institutional category of the IPO.
Advantage is that there is no upper cap on application amount. An individual investor can bid.