Initial Public Offering FAQ

SEBI Guidelines defines Book Building as a process undertaken by which a demand for the securities proposed to be issued by a corporate body is elicited and built up and the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information memoranda or offer document.

The price at which securities will be allotted is not known in the case of an offer of shares through book building while in case of an offer of shares through normal public issue, price is known in advance to the investor. In the case of Book Building, the demand can be known every day as the book is built. But in the case of a public issue, the demand is known at the close of the issue.

Floor price is the minimum price at which bids can be made.

When a company launches an Initial Public Offering or IPO, it can opt for one of the following methods:

• Fixed price method
• Book building method
• Combination of the above two methods 

Fixed price method

In a fixed price method, the company will inform a fixed price at which it determines to issue shares to the interested investors and investors has no option but to submit the bid at the determined fixed price determined by the company.

Book building method

In a Book building method, the company will inform the range of price at which the company will accept the bids and the final price of issuance of shares will only be known once the bidding process is completed. The investors have to place their bids at a price within the price range informed b the company and the final price at which the shares will be allotted will be informed once the finalization of shares is completed. If your bid price is less than the allotment price, you will not receive any shares.

In a Book Building Issue, the company which is issuing the shares will inform a range of price within which the investors have to submit the bids. In this range of price, the investors have to submit the bids. Now the lower end of the price range is called the Floor price and below this price, the investors cannot bid for the IPO. The upper end of the range is called the Cutoff Price and above this price, the investors cannot bid for the IPO.

In an IPO application the company informs the percentage of shares that are reserved for each type of investors. These types of investors are RII, NII, QIB and Anchor Investors.

RII – Retail Individual Investor

This is the most common category of investors bidding in an IPO. This category includes:

• Resident Indian individuals, non-resident Indians (NRIs), and Hindu Undivided Families (HUFs)
• The maximum amount of investment is Rs.2 lakh
• A minimum of 35% of the IPO is reserved for the RII category
• Investors from this category can bid at the cut-off price 
• Bids can be withdrawn until the day of the allotment

NII – Non-Institutional Investor

If an investor qualifies to bid under the RII category but wishes to invest more than Rs.2 lakh, then he falls under the NII category. This category includes:

• Resident Indian individuals, non-resident Indians (NRIs), Hindu Undivided Families (HUFs), corporate bodies, companies, trusts, science institutions, and societies
• Investors can invest more than Rs.2 lakh
• A minimum of 15% of the IPO is reserved for the RII category
• Investors from this category cannot bid at the cut-off price
• Bids can be withdrawn until the day of the allotment

QIB – Qualified Institutional Bidder

This category includes:

• Mutual funds, public financial institutions, foreign portfolio investors, and commercial banks, etc.
• 50% of the offer size is reserved for this category
• Investors from this category cannot bid at the cut-off price
• Bids cannot be withdrawn after the close of the IPO

Anchor Investor

This is a QIB making an application of more than Rs.10 crore in a book building issue. This category includes:

• Resident Indian individuals, non-resident Indians (NRIs), Hindu Undivided Families (HUFs), corporate bodies, companies, trusts, science institutions, and societies
• Investors making more than Rs.10 crore application
• Investors from this category cannot bid at the cut-off price
• Up to 60% of the QIB category can be allocated to this category

In the IPO form, DP stands for Depository Participant. 

In India, there are two Depositories – National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL). Each depository has a network of depository participants which are the link between depositories and companies that issue securities. A DP can be a financial institution, bank, brokerage house, etc. registered with the Securities and Exchange Board of India (SEBI). An investor opens a Demat account with a DP. The name of the DP and the DP ID needs to be specified on the form.

Yes, it is mandatory to have PAN to apply for an IPO. Investors must ensure that they cross-check the PAN after filling the form as any error in the same can lead to a cancellation of the application.

the subscription list for public issues has to be kept open for at least three working days. Also, it cannot exceed ten working days. In case of a book building issue, the IPO remains open for three to seven days. This can be extended by three days if the price band is revised. 

When a company is issuing shares for the first time to the investors via IPO then the company has to inform few details. Market Lot size and the Minimum order quantity are such details.

Market Lot size means that the investors has to apply for the shares in multiples of this lot size. For example Lot size is 10, then the investors can submit IPO application in multiple of 10 and cannot submit to any other number of shares other than the multiple of 10.

Minimum Order Quantity means that the Minimum number of shares that investors has to apply in order to apply for the IPO issue of the company. Below this number the investors cannot apply.

No. You cannot apply in an IPO through multiple applications with the same name. If an investor tries doing it, then all the applications made under the same name will be rejected. Another way of doing this is to apply in the name of different family members. Just remember that the applicant should have a Demat account and PAN.

The Registrar of an IPO publishes a document to stock exchanges and investors providing information about the final price of the IPO, demand or bidding information, and the share allocation ratio. This document is called the Basis of Allotment or Basis of Allocation. It is important to remember that this document is categorized based on the categories of investors and the number of shares applied for. Investors can get a detailed view of the IPO including information regarding the total number of valid applications received and allocation details.

An important element of this document is the ratio of allotment that can tell an investor if the IPO has been oversubscribed and by how many times. This is important because investors can assess the number of applicants that will receive allotment from the total number of applicants. For example, if the ratio of allotment is 1:5, then one out of every five applicants will receive one lot of shares. Also, if the value of this ratio is FIRM, then all applicants definitely receive some shares.

According to SEBI, an investor can make a maximum of five applications from one bank account per issue using ASBA. 

First, an Anchor Investor falls under the category of a Qualified Institutional Buyer or QIB. Here are some differences:

• The Anchor Investor needs to apply for shares worth more than Rs.10 crore
• The bidding price is different for anchor investors and QIBs
• Of the total QIB allocation, 60% is reserved for anchor investors
• Anchor investors are not allowed to sell their shares up to 30 days from the date of allotment of the said shares via an IPO

One important aspect of an anchor investor is that if the cut-off price is lower than the bid price of an anchor investor, the excess amount is not refunded to them. Since they invest more than Rs.10 crore, their participation encourages smaller investors to apply.

An initial public offering (IPO) is the process of a company first selling its shares to the public. These shares are initially issued in the primary market at an offering price determined by the lead underwriter.

The primary market consists of a syndicate of investment banks and broker-dealers that the lead underwriter assembles and that allocate shares to institutional and individual investors. Being allocated shares at the offering price is referred to as participating in the IPO. Participation in the IPO happens before the security is first traded on any of the stock markets.