Frequently Asked Questions on IPO

Equitymaster's list of frequently asked questions on IPOs in Indian St ock Market.

• What is a lot size?
• What is an IPO Price Band?
• What is Issue size?
• Difference between Book Building Issue and Fixed Price Issue?
• Difference between IPO Cut-Off Price and Floor Price?
• Who are Anchor Investors?
• Can the bidder revise his bids after applying for an IPO?
• What is minimum number of days for which bid should remain open in book building?
• What is the main difference between offer of shares through book building and offer of shares through normal public issue?
• What is the difference between RII, NII, QIB and Anchor Investor?
• Where to check IPO Application and Allotment Status?
• What is Market Lot Size and Minimum Order Quantity for an IPO?
• Is investing in IPO's less risky than directly investing in stock market?
• How is IPO listing price decided?
• Who can apply in the non-institutional bidder category of an IPO?
• How cut off price of IPO decided?
• What is GMP?

• What is a lot size?

  A lot size is the minimum number of shares that an investor needs to bid for. It is different for each IPO and is fixed by the company.

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• What is an IPO Price Band?

  IPO Price Band is the price range within which investors can bid for the shares. The minimum price is called the floor price and the maximum price is called the cap price.

  In case the company revises the price band, the offer period gets extended for at least three additional working days.

  Any revision in the price band and the revised offer period, if applicable, is shared by notification to the stock exchanges by issuing a press release and on the websites of the book running lead managers.

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• What is Issue size?

  The issue size is the the total value of the IPO. It is calculated by multiplying the number of shares offered by the company by the issue price per share.

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• Difference between Book Building Issue and Fixed Price Issue?

  In a Book Building Issue, securities are offered at prices above or equal to the floor prices, whereas in a fixed price issue, securities are offered at a fixed price.

  In case of Book Building, the demand can be known everyday as the book is built. But in case of the public issue the demand is known at the close of the issue.

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• Difference between IPO Cut-Off Price and Floor Price?

  Cut off price is the offer price decided by the company and merchant bankers after the IPO subscription has closed.

  Floor price is the lowest price at which an investor can place a bid for the shares of the company.

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• Who are Anchor Investors?

  Anchor investors are institutional investors who are allotted shares just before an IPO opens for subscription. All anchor investors are bound by a lock-in period since they get a confirmed allotment of a company's shares.

  These could be mutual funds, pension funds, insurance companies and others.

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• Can the bidder revise his bids after applying for an IPO?

  Yes, retail investors can revise the quantity or price in their bids after applying for an IPO as long as they do it before the offer closing date.

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• What is minimum number of days for which bid should remain open in book building?

  As per the market regulator’s norms, the book should remain open for a minimum of 3 working days. Here, the concept of 3 working days excludes Sundays, Saturdays and other trading holidays.

  The issue can remain open for more than that period if the company and the investment bankers consider it necessary.

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• What is the main difference between offer of shares through book building and offer of shares through normal public issue?

  The price at which shares will be allotted is not known in the case of an offer of shares through book building. While in the case of an offer of shares through a normal public issue, the price is known in advance.

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• What is the difference between RII, NII, QIB and Anchor Investor?

  Under the market regulator’s guidelines, there are four types of investors who can bid for shares during the IPO process.

  1. Retail investors (RII)

     The category of retail investors is the most popular one. It includes both resident Indians and non-resident Indians (NRI), as well as HUFs. The maximum sum that can be invested in this category is Rs 2 lakhs.

     This category allows bidding at the cut-off price, with retail investors receiving at least 35% of the total offer.

  2. Non institutional investors (NII)

     The non-institutional category is open to all retail category applicants who wish to apply for an amount greater than 2 lakh. A minimum of 15% is booked for them.

     NII have the option of withdrawing their bids before the day of the allotment. They are not, however, entitled to bid at the cut-off price.

  3. Qualified institutional buyers (QIB)

     QIP in the stock market is a fundraising tool, whereby a company raises capital by issuing equity shares, fully and partly convertible debentures, or any securities other than warrants which are convertible to equity shares.

     The only parties eligible to purchase QIPs are Qualified Institutional Buyers (QIBs), which are accredited investors, as defined by the market regulator.

  4. Anchor investors

     Anchor investor category includes QIBs applying to invest Rs 100 million or more through the book-building process. Up to 60% of the QIB group may be allocated to anchor investors.

     Note that the price for anchor investors gets set separately.

     Anchor investors need a minimum application size of Rs 100 m, and merchant bankers, promoters, and their immediate relatives are not eligible.

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• Where to check IPO Application and Allotment Status?

  To check the IPO allotment status, you need to visit the registrar of the company’s official website and provide the details as asked in the allotment status section of the website. This will provide you with the IPO allotment information.

  Meanwhile, the Bombay Stock Exchange (BSE) has also made available the facility to view the status of their issue applications on its website.

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• What is Market Lot Size and Minimum Order Quantity for an IPO?

  Market Lot Size and Minimum Order Quantity are two important factors an investor should know while bidding for an IPO.

  The Market Lot Size is the number of shares in a lot. The total minimum lot size amount should not cross Rs 15,000 while the total maximum lot size amount must not cross Rs 200,000.

  Meanwhile, Minimum Order Quantity is defined as the minimum count of shares an investor needs to apply for while bidding in an IPO.

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• Is investing in IPO's less risky than directly investing in stock market?

  When it comes to investing, both avenues carry some degree of risk.

  However, unlike listed businesses that have been under public and regulators' scrutiny, most IPOs are untested business models. Further, IPOs are usually priced at exorbitant valuations that do not offer enough margin of safety.

  In our view, one should wait for track record post listing and enter well performing businesses at reasonable valuations.

  Due diligence and margin of safety are must in our view, whether it's an IPO or listed stocks one wants to invest in.

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• How is IPO listing price decided?

  There are various factors that impact how an IPO will list on its listing day and the chances of profits to the investors.

  The main factor by which IPO listing price is decided is based on market demand and supply. If the demand for the shares exceeds the supply, then the listing price is typically higher than the offer price, and vice versa.

  Another factor in play is the prevailing market conditions.

  And then there’s grey market premium (GMP). More often, many people rely on GMP to decide whether they should invest in an IPO. The GMP gives an idea of the market's perception of an IPO and how it will perform on the listing day.

  If you are looking forward to applying for an IPO, sure take a look to see what could happen on listing day. But remember it shouldn't be the only factor influencing your decision on whether or not to hold or exit the stock.

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• Who can apply in the non-institutional bidder category of an IPO?

  Non-institutional investors include NRIs, HUFs, corporations, individuals and trusts. Basically, this category includes investors subscribing for more than Rs 2 lakh worth shares in an IPO.

  An individual retail investor can also apply in non-institutional investors category of an IPO.

  These individuals/corporations don’t need not be registered with the market regulator for applying under this category. Usually, 15% allocation is reserved for only non-institutional bidders.

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• How cut off price of IPO decided?

  A cut-off price is a price at which shares get issued to investors.

  When an IPO is in its last leg towards closure, investment bankers commence the process of price discovery. However, since there is no fixed price announced, there are various bids that happen at different prices.

  Bankers decide the final price through a weighted average of all the bids received in total. The final price that is decided is known as the cut-off price.

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• What is GMP?

  GMP stands for grey market premium. It is the amount, over and above the issue price, that traders are willing to pay or ask for to trade IPO shares. The GMP can tell you how an IPO will perform on its listing day.

  If you are applying for an IPO, take a look to see what could happen on listing day. But remember GMP shouldn't be the only factor influencing your decision on whether or not to hold or exit the stock.

  If you are an investor, then we would say take the GMP with a pinch of salt. A factor as volatile as GMP can't be a deciding factor.

  Therefore, you should never apply for an IPO just because it commands a good GMP. You should apply for an IPO because you believe in the company's earning potential. Hence more weightage should be given to the fundamentals of the company.

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PLEASE NOTE:

The information in the web site has been compiled from sources we believe to to be reliable, but we do not hold ourselves responsible for its completeness or accuracy. This is not an offer to sell or a solicitation to buy any securities. Investors are advised to read the offer document before making an investment decision.