IPO Jargons Simplified

IPO Basics
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Last updated on July 19th, 2022 at 08:48 am

Understanding IPO Basics

Initial public offer is issuance of shares to public for the first time by a public limited company (private company is converted into a public limited by passing a special resolution to offer shares to general public). The company issuing the shares is called the issuer, IPO is generally underwritten by one or more investment banks who also arrange for the shares to be listed on stock exchanges.  An IPO constitutes fresh issue of shares to the public or offer for sale by the existing promoters who want to take partial or full exit i.e. they are selling off their share in the company.

An IPO could be a mixture of both fresh issues and offer for sale or entirely a fresh issue or an offer for sale.

The categories of investors include Qualified Institutional Buyers, Retail Investors, and High Networth Individuals.

What is Draft Red Herring Prospectus? IPO Jargons Simplified

Draft Red Herring Prospectus (DRHP) is prepared by the lead manager to submit to SEBI for IPO approval. The document contains details regarding the promoters, business details of the issuers, forward-looking statements, and risks attached to the issue. It also contains the latest financial information about the issuer. DRHP is available on SEBI’s website.

What is Red Herring Prospectus?IPO Jargons Simplified

After the DRHP has been published on the website of SEBI and the merchant banker, anyone including SEBI can give comments/grievances about the company and information shared in the DRHP for up to 21 days. These comments are then sent for clarification to the merchant banker. When SEBI gets satisfactory replies to the comments, the company gets approval from the SEBI. The company then refiles the updated final document called the “RHP”. It contains all the information that DRHP has but does not contain any information on the final price of the shares to be allotted. The price band is generally decided based on the book-building process.

One can find RHP on SEBI’s website under offer Documents. It can also be found on the website of merchant bankers and stock exchanges. The company is also required to make public announcements about the filing in at least one English, Hindi, and one regional language newspaper.

Who is Book Running Lead Managers (BRLMs)?

The appointment of lead managers is a very important part of the IPO process. They are SEBI registered independent lead managers appointed by companies to assist them in raising funds from the market through IPO. They have a strategic role both pre-issue and post-issue. Their pre-issue role is to ensure completeness and accuracy of critical documents like prospectus, business plans, legal aspects, and other compliances. They also plan marketing strategies, work out the pricing of the issue to ensure successful public issues. They also appoint registrars, advertising agency and bankers to the offer. Post issue, LMs coordinate with the Registrar and Bankers of the issue to manage the escrow accounts, processing the refunds to bidders, and other follow-up activities. Kotak Mahindra Capital Company, JM Financial Consultants, SBI Capital Markets, Edelweiss Financial Services are some of the BRLMs.

Who are Bankers to the Issue?

Bankers to the issue carry out all the activities of ensuring that the funds are collected and transferred to the Escrow accounts. The LM ensures that Bankers are appointed in all the mandatory collection centers as specified in DIP (Disclosure and Investment Protection) Guidelines 2000. The LM also ensures follow-up with bankers to the issue to get quick estimates of collection and advising the issuer about the closure of the issue, based on the correct figures.

What is the role of the Registrar in the Issue?

The registrar’s role involves creating a final list of valid applications. They ensure that refunds are processed to investors who did not get any allotment. They also transfer shares to Demat accounts for allotted investors. The Registrar along with the BRLM ensures that the process is followed right until the end.

Who are Underwriters to the Issue?

Underwriters are those who buy the securities from the issuer when some of the shares do not get subscribed and sell them through their network. Underwriters earn by taking underwriting fees from the issuers and also by selling underwritten shares at a profit. They carry the risk of being unable to sell the shares at a specified price.

What is the Book Building process?

It is the process of price discovery. In this process, investors are asked to bid on the basis of the price range provided by the company. This method provides an opportunity to the market to discover the price of the security which are on offer.

Last but not least,

What is the eligibility to apply for an IPO?

An investor should meet the following criteria:

  • A valid Demat account
  • PAN Card
  • Not required to have a trading account. But if the investor wants to sell the stock on listing, trading account is required.

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CA Priyanka Choudhary Jain

 

Disclaimer: The above content is for general info purpose only and does not constitute professional advice. The author/ website will not be liable for any inaccurate / incomplete information and any reliance you place on the content is strictly at your risk.

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