IPOs

The method of price discovery (Finding the prices of the equity shares of the Company), is called book building. The optimum prices of the shares of the Company have to be fixed through a process known as book building.

A price range known as a price band is decided by the Company. It has a lower limit and an upper limit .The lower price (The shares will not be offered at a price lower than this), is called the floor price.

The upper price (The upper limit of the pricing of the shares), is called the ceiling price. Shares of the Company are offered within the price band.

You can bid only between the floor price and the ceiling price. The issue is then closed for subscription. The cut off price is then decided by the Company issuing the shares and the lead manager to the issue, based on the interest and the appetite of the investors to the equity (share) issue by the Company.

All investors who have submitted bids at and above the cut off price, are able to procure the shares of the Company. If you are a retail investor, then you can also apply at the cut off price (you are ready to purchase at the price decided by the Company and the lead manager to the issue).

If you have applied at the ceiling price and the cut off price is less than the ceiling price, then the excess money is refunded to your account.

• An attractively priced IPO gets a good response from investors as the chances of gains on listing are high.

• Book building method to fix the price gives investors an opportunity to choose the price they are willing to pay. Book building is a price discovery mechanism in order to fix the price of the IPO. The underwriter specifies the floor cap or the minimum price of the IPO and the cap price or the maximum price. The investors must choose a price within this range called the price band. The most popular price among the investors is called the cut-off price. Shares are allotted to anyone who bids above the cut-off price in the requisite proportions depending on the size of the issue.

• The success of an IPO depends heavily on market sentiments. The IPO investments are made for short term gains and investors invest in order to make profits mainly in a bullish market.

• Investors in an IPO of a Company buy shares at a fixed price and do not have to pay stamp duty and brokerage fees.

• About 50% of the IPO size is allotted to qualified institutional buyers. The IPO also has anchor investors who subscribe for 30% of the quota of the qualified institutional buyers. These anchor investors serve as brand marketers or ambassadors of the IPO. The investor sees names or institutions of high repute and this gives them a measure of confidence to invest in the IPO. They stay invested for a period of 30 days .If the qualified institutional buyers and anchor investors are bullish on the IPO then the price band is higher subject to a certain maximum limit.

• According to the new rules every retail investor will get a minimum number of shares subject to availability while the remaining will be allotted in the requisite proportion. According to earlier rules in case of an over subscription the highest bidders were allocated shares and the bidders for lesser amounts got no shares. This discouraged lesser investors from participating in the IPO. This shortfall has been made up.