Key IPO Terms Every Investor Should Know Before Investing

When we talk about IPOs, there are a lot of technical terms like basis of allotment, book-built issue, RHP, DRHP, QIBs, HNIs / NIIs, market lot, BRLM etc that are routinely used. Quite often, investors may not fully comprehend the importance of these concepts and how they fit into an IPO.

Key Terms Related to IPO

Here is a quick glance at some of the popular terms and concepts pertaining to an IPO and what they mean - 

1. Abridged Prospectus – This is the reduced or comprehensive version of the main IPO prospectus which contains all the basic details of the IPO.
2. DRHP – Draft Red Herring Prospectus (DRHP) is the first document that the company planning to come out with an IPO, files with SEBI. The first step is that SEBI has to approve the DRHP and only after that the company can go ahead with the other steps of the IPO.
3. RHP – Red Herring Prospectus (RHP) is the improved version of the DRHP that is filed with SEBI. Apart from more granular details of the issue, the RHP normally includes the issue dates, issue size and the issue price. It is also used as an important information document by investors looking to invest in the IPO. This is followed by an abridged version of the prospectus to enable investors to make an informed decision.
4. New Issue and Offer for Sale – New issue and Offer for sale (OFS) are the two popular types of IPOs. In a new issue, fresh shares are issued to the public, while the OFS is the sale of shares by early investors or promoters to the public. The new issue is equity dilutive while the OFS is not equity dilutive. Normally, most mainboard issues are a combination of new issues and OFS.
5. BRLM – Book Running Lead Managers or BRLMs manage the issue and are also called investment bankers to the issue. They help the company in deciding on the pricing of the IPO, marketing the issue, interfacing with SEBI, stock exchanges and registrars etc. The responsibility of making the IPO a success lies with the BRLMs.
6. ASBA – ASBA is a form of payment which expands into Applications Supported by Blocked Amounts. When you apply using the ASBA route, the amount of the application is not debited to the bank account but only blocked. Post the allotment finalisation, the bank account is debited to the extent of allotment and the balance amount is released.
7. Basis of Allotment – Basis of allotment is finalised by the company and BRLMs in consultation with the stock exchanges. It decides in what ratio the shares should be allotted to valid applicants under HNI / NII, Retail and QIB categories. The basis of allotment, nowadays, is finalized on the working day after the issue closure.
8. Lot size – Lot size is the minimum, bid that investors must put in for the IPO. IPO bids can only be done in 1 lot or multiples of the lot size.
9. Fixed Price and Book Building – Fixed Price and Book Built IPO exist, but the latter is more popular. In a fixed-price IPO, the price of the IPO is fixed in advance and bids are at that price only. In book building, a price band is decided and valid bids can be placed in that band. The final price is discovered by book building.
10. Cut-off Price – Cut-off price is essentially for retail investors, who need not bid at a certain price. Instead, they can just bid at cut-off which means the discovered price is acceptable to them. Bidding by retail investors at cut-off increases your chances of allotment.
11. Floor Price – An issuer accepts bids from applicants for the shares when it chooses to start a book-building IPO. The issuer must, however, indicate the lowest price at which it will accept bids as well as the maximum range in order to initiate a book-building issue. The IPO floor price is the lowest price in this range.
12. Listing Price – The listing price of an IPO refers to the opening price of an IPO on the first day of listing on the exchange for secondary market trading.
13. QIB, HNI/NII/Retail Investors – QIBs (Qualified Institutional Buyers), HNI / NII (High Net Worth Investors / Non-Institutional Investors) and Retail are the 3 categories of investors.
    1. Retail investors include individuals and HUFs, where the bid cannot exceed Rs 2 lakhs.
    2. For bids by corporates, NBFCs, and bids above Rs2 lakh, there is the HNI / NII quota.
    3. QIB bids are by specified institutions like banks, insurance companies, mutual funds, FPIs etc.
14. Stockbrokers – These are depository participants that enable investors to apply for initial public offerings (IPOs) or purchase and sell shares. They facilitate the buying and selling of shares during the trading process and offer investing services. The people who open an account are stockbrokers.

The Steps in the IPO Process

Now that you have a fair idea about some of the key terms related to an IPO, let us briefly run you through the key steps in the IPO process.

• The IPO process starts with the filing of DRHP
• The next step is awaiting the SEBI approval
• Post-SEBI approval, the RHP filing and regulatory approvals are completed
• A key stage is the marketing of the IPO to institutions, HNI and Retail
• Once the IPO closes, the basis of allotment is finalized on T+1 day after the IPO closure
• On the T+2 day, the refunds are processed and Demat credits done
• The last step is that on T+3 day after IPO closure, the stock gets listed.

Conclusion

Understanding key terms related to an IPO empowers you to make informed decisions, and better assess risks. It builds confidence and ensures clarity, enabling smarter investments and better participation in the IPOs. This knowledge also helps you align the IPO investments with your financial goals. Ultimately, being well-informed paves the way for a successful and rewarding investment journey.