14 Must Know Public Issue (IPO) terms

Public Issues are in the air. You can call it the IPO season. It seems that the Primary Market is competing with Bollywood, releasing new issues every week. But before you share your hard earned money with the promoters of the company, it is very important to get a basic understanding about the various technical terms, abbreviations and jargons used in the primary market ( call it the IPO market). I have tried my best to explain in brief some of the key terms, without making any reference to the various sections and clauses governing the primary market. So here are a certain key Public Issue (IPO) terms :

1. IPO : IPO stands for Initial Public Offer. An IPO is the first sale of shares of a company to the general public. The promoters of the company, after complying with the various guidelines of SEBI (Securities and Exchange Board of India) and The companies Act, ask the public at large to subscribe to their shares so that they can generate capital and utilize the same for expanding their business. A successful IPO can raise a substantially huge amount of capital.

IPO terms2. FPO : FPO stands for Follow-on Public Offer. Once a company comes with an IPO , it gets listed on the stock exchanges. After a certain period of time, if the company again intends to raise capital from the general public, then it again comes with a public issue which is called an FPO (Follow-on Public Offer ). It is a supplementary issue made by a company once it is listed and established on the stock exchange. In short, the first public issue of a company is an IPO, and any further public issue of the same company is called an FPO. For example, Shipping Corporaton of India (SCI), a listed company, is again coming up with a public issue which will be its FPO ( i.e. a second public issue).

3. Listing : Once the issue gets subscribed and the shares are allotted, they are listed on a recognized stock exchange e.g. BSE, NSE etc. Listing means that company has adhered to the terms and conditions of the stock exchange and its shares are now a part of the list of shares which can be traded on the stock exchange. Post listing, any investor can sell the shares, allotted at the time of the issue, in the secondary market.

4. Bid-cum-Application Form : For applying in any public issue, each investor must fill a standard form providing all the relevant details like Name, PAN, Demat id, Bank account details, Bid price, Number of shares applied etc. Such a form is called a Bid-cum-Application form. It can be submitted through the offline or online mode. An investor must ensure that all the relevant details are filled correctly to avoid rejection of application and to ensure smooth allotment of securities.

5. Price Band : A price band is the range of price within which an investor can place his bid for the securities. The price mentioned by the investor in the bid-cum-application form can neither be less than the lower limit of the price band nor can it exceed the upper limit of the price band. For example, In the recent IPO of Coal India, the price band was Rs. 225-245 per share, which means that an investor can bid only within the range of Rs. 225 to Rs. 245

6. Floor Price : In a price band, the lowest price is called the floor price, below which a bid cannot be placed. In the above example Rs. 225 is the floor price of the Coal India IPO

7. Cap Price : Cap price is the upper ceiling limit in a price band beyond which a bid cannot be placed. Again, taking the same example of Coal India, Rs. 245 is the Cap price, beyond which you cannot place the bid.

8. Minimum order quantity : Minimum Order Quantity is the minimum number of shares which the investor has to apply for in a public issue. For example, in the case of Coal India’s IPO, the minimum order quantity was 25, i.e. an investor has to bid for atleast 25 shares.

9. Market Lot : If an investor wants to bid for shares which are more than the minimum order quantity, then he can do so by bidding in multiples of a certain number of shares which is known as the Market Lot. By continuing the above example, if an investor wants to apply for more than 25 shares of Coal India, then bids can be made in multiples of 25 shares, which is the market lot size in case of the Coal India issue. Thus, applications can be made for 25, 50, 75 …….number of shares until the maximum subscription limit is reached. In case of Coal India, the minimum order quantity and market lot size, both were 25 shares.

10. Maximum Subscription Limit for Retail Investors : Maximum Subscription Limit for Retail Investors is the maximum amount of investment which can be made though a single bid-cum-application form, or simply speaking, by a single individual, in a public issue. Previously, retail investors were allowed to make an application of a maximum of Rs.1,00,000, but now SEBI has increased this limit to Rs.2,00,000. Any application by an retail investor which exceeds Rs. 2,00,000 becomes an application by a High Net Worth Individual (HNI), thus disabling the investor to enjoy the benefits of discount which are offered in some big ticket IPOs to the retail investors.

11. Cut Off Price : In book building issues, the issuer company specifies a price band within which the bids are made. The actual issue price can be any price above the floor price and within the price band. This issue price is called the Cut Off Price. This price is determined after considering the demand for the stock by the investors. Investors, in order to get allotments in big ticket public issues, bid at the cut off price, conveying their intention that they are willing to pay any price for the stock within the price band, at the end of the book building process. 

12. ASBA (Application Supported by Blocked Amounts) : ASBA is an alternative mode of making payments in public issues whereby the application money stays in the bank account of the investor until the allotment is made. Only that much amount of funds are debited to the investor’s bank account for which the allotment is made and the rest of the blocked amount is released. In case the application is made using the ASBA facility, the need for refunds is completely obviated. For example : if an investor makes an application for Rs. 2,00,000 , then in the earlier system, he was required to pay the entire sum of Rs. 2,00,000 upfront, either through a cheque or net-banking and then if shares worth Rs. 1,50,000 are only allotted, then Rs. 50,000 used to get refunded. Under the ASBA mechanism, the investor just need to keep Rs. 2,00,000 in his bank account and at the time of allotment only Rs. 1,50,000 would be debited to his account, thus releasing the left over blocked amount of Rs. 50,000 and also doing away with the cumbersome task of issuing refunds. 

Key IPO terms
13. Book Building Process : Book Building is one of the methods of carrying out a public issue, the other being the Fixed Price method. Under the Book Building method, the price at which securities will be offered is not known to the investor. The investor is allowed to bid in a given price range called the price band, and then, after the bids are closed & looking at the demand for the shares at various price levels within the price band, the final issue price is decided by the Merchant Bankers or BRLMs. This process leads to a better price and demand discovery. It is called the “Book Building Process” because during the entire issue period, the book for the offer remains open and keeps building up with the bids collected from investors.

14. BRLM (Book Running Lead Manager) : BRLM are those financial institutions whose names you find at the bottom of the bid-cum-application form like Karvy Securities, Kotak Mahindra, SBI Capital, Enam Securities etc. On a serious note, BRLMs or Merchant Bankers are those financial intermediaries which are involved in the IPO process right from the very first stage and play a vital role in preparation & submission of prospectus, price fixation, application processing, allotment and listing.

If you think that I have not included any key term related to IPOs/FPOs then please let me know, I will incorporate the same here. Also, please don’t hesitate in leaving a comment and sharing this little piece of information. Your feedback would be highly appreciated.

Happy Investing

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Share your views...

15 Respones to "14 Must Know Public Issue (IPO) terms"

Mohan said...

Very good educative article on the basics of IPO Nandan. Even a layman can understand these terms easily now with your post. Keep it up.

December 2, 2010 at 6:58 AM
Nandan Narula said...

@ Mohan : Thanks a lot for your kind words of appreciation.

bhumika said...

hey thats a nice blog...I myself am a CS and CFM and a CA Final student...so loved it..followin u..

December 4, 2010 at 4:01 AM
Nandan Narula said...

@ Bhumika : Thanks a lot for your feedback and for following MONEY MATTERS. Hope to see you back at MONEY MATTERS soon.

Rahul Koundal said...

Hi Nandan !! Great efforts to explain IPO terms. I am bit confused, what audience is your target ?
1)If it Finance students (like CA, CS ICWA etc) then your blog posts are not enough for any topic.

2) If your target audience is small investor (non finance background) they will not understand anything out of it because there is nothing specific mentioned e.g before investing in any IPO study company profile etc.

3) If your target audience is big investors, sorry but they would not even stay at your post for five minutes because they want a consultant guiding you through his decisions.

We are here to learn from each others and polish our skills. I am following your blog last couple of days and wanted to share this feedback. I hope I am not so crude.

December 5, 2010 at 5:45 AM
Nandan Narula said...

@ Rahul : First of all i would like to thank you from the depths of my heart because this is one of the most honest feedback which i have ever recieved. When we talk about finance, many people are simply scared of it because of lack of knowledge, lack of awareness. Ignorance is the biggest hurdle in understanding and managing your finances. Through this blog, i aim towards spreading those little grains of knowledge which i can with my limited resources. Now i dont write solely for CAs or small investors or HNIs. NO. . thats not my way taking the things. If you go through a newspaper or to be more precise through a business paper, i mean i have been reading them regularly , atleast for the last 5 years and still there are many news, stories and articles which are sometimes totally alien to me and then i simply think that what is there in it for me??
But that newspaper has something or the other for everyone. I being an individual and not a professional full time blogger cannot post 10s of articles daily covering the interests of all classes and masses.
Further, as i am also a CA Final student, and about a quarter of my readers who are professionals have also expressed that even after studying all the relevant sections, rules and guidelines, it is difficult to apply the same i the real world and actually get something out of it. I just try to provide the information in a simple manner, which can be useful for professionals as well as non-professionals
Secondly, I have written articles specially for small investors namely Investor be aware, Power of Attorney- compulsion or convenience, Missed the deadline of filing returns . . . Here i agree that i havent written anything about the pre-IPO research and how to study the fundamentals of the company, but do you think that a small investor who works for 10 hours a day, has the time and willingness to study a company. . i dont think so. . many experts have failed to study and predict. . But , yes you have given me a good idea for one of my upcoming posts and i will try to cover it in detail

Thirdly, be it small investor or HNI, knowledge is good for all, its upto them if they want to gather it or not. I am an independent financial consultant and also deal with HNIs and small investors, i agree that they act on your recommendations, but even they sometimes try to update themselves
and in the end. . its the internet. . and my content can be freely viewed and shared by anyone, so readers of different profiles may land up here, some may find it useful, some may not, but i will keep trying and putting in my efforts to meet the requirements of most of my readers.
Do visit MONEY MATTERS again and keep sharing your thoughts. I would really appreciate that
Have a nice day

Nandan Narula

Rahul Koundal said...

My God ! Such a long comment, I think you made a history.

To re-iterate, I do appreciate your efforts, there are hardly people especially CA student into serious blogging, so you are among few.

I think my reaction was being CA, may be a non finance guy would appreciate it and find it really useful.


December 5, 2010 at 9:41 PM
Nandan Narula said...

Ok. .so i was talking to a Chartered Accountant. Thats great, thanks for taking the pains of reading this stuff and also communicating your opinion. I will try my best to suit the tastes of professionals.

Have a nice day
Nandan Narula

aishu said...

Very useful post, Thanks a lot sir

December 7, 2010 at 11:09 PM
aishu said...

Very useful. Easy to understand. :)

December 7, 2010 at 11:28 PM
Nandan Narula said...

@ Aishu : Thanks and thanks

Vinod said...

hi Nandan,
Great article. I have a question reqarding IPOs.
If there is over-subscription, how is the allocation made?

December 9, 2010 at 7:39 AM
Nandan Narula said...

Hi Vinod
Thanks a lot for your valuable feedback. Regarding your query, if the issue is being carried out through a book building process, then first of all the price of the issue is determined and then all the bidders at or above the price are being allotted the shares on a pro rata basis. If you subscribe at cut off price, then allotment will depend on the number of times the issue is oversubscribed.
I would like address this query of yours through a separate article as other investors may also find it useful.
Thanks Vinod for raising this query and please subscribe to MONEY MATTERS so that you dont miss the detailed answer to ur query in one of the upcoming blog posts

ranjit said...

Dear Nandan,

Amazing sytle of explanaition in your articles. As a Noob i found it amazingly easy to understand them.

If possible kindly explain these points

a) Once the allocation process takes place is it possible that allocation of shares per person may happen below the minimum bid quantity

case point being MOIL

If "a" is true , then i have a follow up question

For MOIL Total Number of shares in RII Category is 11524800

Here if more than the 11524800 Investors (RII's) apply at cut off price, who gets allocated and what quanity. Cause that way it works out to less than one share per person.

December 13, 2010 at 9:51 AM
Nandan Narula said...

@ Ranjit : Welcome to Money Matters and thanks a lot for your valuable feedback. I have received almost a similar query just a day back by another reader. will surely come up with a dedicated article with respect to the price discovery and the delivery mechanism of IPOs under the book building process.

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