|
IPO Frequently Asked Question (s) |
||||||||||||||
|
| provide answers
to commonly asked questions about IPO’s in Indian Stock Market. This IPO
FAQ Category helps IPO investors for their better understanding of IPO’s
and to resolve their queries. 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. 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 does 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. 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. 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. 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. 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 document are available on SEBI's website in the section of ‘Reports -> Public Issues: Draft Offer Documents filed with SEBI" at: http://www.sebi.gov.in/SectIndex.jsp?sub_sec_id=70 "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". Red
Herring Prospectus also can be found on SEBI website at: 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.
Finally share of the issuer company gets listed in Stock Market. 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.
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. What is the difference between retail investor, Non-institutional bidders and Qualified Institutional Bidders (QIB’s)? Answer: Investors can apply for shares in an IPO in 4 different categories:
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. 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? Answer: 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. Advantage: You can apply for more then Rs 2 Lakhs and may get much better allocation then a retail bidder. Disadvantage: 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. Is it mandatory to have PAN number to apply in an IPO? Answer: 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. How many days is the issue open? Answer:
(Information source SEBI) What information should I keep after I submit the IPO application form? Answer: 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.
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/-. Example: Investor can apply in this IPO as below: At Rs 44/- * 125 Shares * 1 Lot =
Rs 5500/- At Rs 52/- * 125 Shares * 2 Lot =
Rs 13000/- 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. 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:
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. |
