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IPO | IPO Glossary

IPO glossary

Definitions of common terms used in the IPO

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Aftermarket performance: Used to describe how the stock of a newly public company has performed with the offering price as the typical benchmark.

All or none: An offering which can be canceled by the lead underwriter if it is not completely subscribed. Most best effort deals are all or none.

Allotment: In case of over-subscription of an IPO, securities are distributed to investors by a procedure called allotment .After inviting for applications from investors, a company allots shares to them before listing itself on the stock exchange.

Allottee: A person to whom an allotment of the securities applied for in a public issue is made.

American depositary receipts (ADRs): These are offered by non-U.S. companies wishing to list on a U.S. exchange. They are called "receipts" because they represent a certain number of a company's regular shares. issued to US investors in foreign companies.

Auditor: An auditor is a person who is appointed by shareholders of the company (external auditor) He is responsible to examine the affairs of the company on their behalf and thereby report about the fairness and truthfulness of financial statements.

Authorized Capital: It is the share capital that is stated in the Memorandum of Association of a Company and is the maximum share capital that a company can issue. The authorized share capital may or may not be equal to  issued share capital.

Banker to issue: Bankers to the issue are entities that act as issue and collecting centres for IPO forms and cheques. These entities are registered with SEBI.

Bid: A bid is the demand for a security that can be entered by the syndicate/sub-syndicate members in the system, in a book-building process. The two main components of a bid are the price and the quantity. The person who has placed a bid in the Book Building process is called a Bidder.

Book Building Process: It is the process of issue of securities wherein the price of security is determined by forces of demand and supply in the capital market. Unlike ordinary types of issue of capital, here the price is determined on the basis of responses of investors.

Book Running Lead Manager: In a book building process of issue of securities, one of the Lead Merchant Bankers is appointed by the issuing company as the Book Runner. The book runner prepares and submits a draft prospectus with SEBI for approval, forms a syndicate and thereby determines the issue price of the security along with the issuing company on the basis of bids received from the investors.

Book Value: Book value of equity is the sum of retained earnings, securities premium and other items that represent shareholder’s equity. Book value per share is calculated by dividing the book value of shares by the number of shares outstanding.

Bonus Issue: It is the distribution of undistributed profits of a Company by issuing fully paid-up shares to existing shareholders, free of charge, in proportion of their existing shareholding.

Bought Out Deals: It is a process by which an investor (usually the investment banker) buys out a significant portion of the equity of an unlisted company with a view to make it public within an agreed time frame.

Break issue: A type of stock initial public offering (IPO) that trades below the original offering price to the market within the first few months after trading begins. A break issue can be the result of poor market conditions as a whole, industry concerns or lack of demand in the new issue itself.

Brokers: Brokers form a very vital link in the distribution value chain of financial products. Companies making public issues appoint brokers to procure subscription. The managers to the issue distribute prospectuses and application forms to the brokers.

Conditional offer: This is obtained by a lead underwriter from its investor clients before an IPO is priced to gauge demand for the deal. Used to determine offering price.

Direct public offering (DPO): An offering in which a company sells its shares directly to the public without the help of underwriters. Direct public offerings are considerably less and will typically raise much less than a traditional offering.

Discount: When a company is selling its shares below their face value, it is said that the company is issuing shares at a discount.

Draft Prospectus: For issuing securities to the public, companies are required to file a draft prospectus with SEBI, through an eligible merchant banker, 21 days before filing the required prospectus with Registrar. A Draft Prospectus provides the information on the financials of the company, promoters, background, tentative issue price etc. The final prospectus is thereby printed after obtaining the necessary clearance from SEBI and Registrar of Companies (ROC).

Firm Allotment: Generally, a part out of the public issue out of the total amount raised in the market is fixed to be sold to promoters, in order to avoid diluting their stake in the company. This is called Firm Allotment.

Filing: When a copy of prospectus attached with the required documents required IS submitted to the Registrar of Companies (ROC),it is called filing.

Flipping: when an investor buys an IPO at the offering price and then sells the stock soon after it starts trading on the open market. It is generally discouraged by underwriters, especially if done by individual investors.

Floor price: The minimum offer price below which bids cannot be entered. It is the lower range of the price band. The Issuer Company in consultation with the Book Running Lead Manager fixes the floor price.

GDR: A bank certificate issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international bank. The shares trade as domestic shares, but are offered for sale globally through the various bank branches. A GDR is very similar to an American Depositary Receipt.

Greenshoe: A provision contained in an underwriting agreement that gives the underwriter the right to sell investors more shares than originally planned by the issuer. This would normally be done if the demand for a security issue proves higher than expected. A greenshoe option can provide additional price stability to a security issue because the underwriter has the ability to increase supply and smooth out price fluctuations if demand surges. Also called the overallotment option.

Gross spread: The difference between an IPO's offering price and the price the members of the syndicate pay for the shares. It usually represents a discount of 7 percent to 8 percent, about half of which goes to the broker who sells the shares.

Impersonation: A person who uses fictitious names for acquiring or subscribing shares or induces the company to allot or register any transfer of shares to him or any other person in a fictitious name.

Initial public offering (IPO): When a company sells its shares to the public for the first time it is called IPO. An IPO is a type of a primary offering, which occurs whenever a company sells new shares, and differs from a secondary offering, which is the public sale of previously issued securities, usually held by insiders.

Institutional investors: Mutual Funds, Banks, Insurance Companies, etc that are engaged in large scale investment in securities. In the sale of an IPO, there is a fixed percentage buying for institutional investors.

Investment Banking Firm: An organization that acts as an intermediary in the stock market between issuers of the securities and the investors. They perform various services of financing, facilitating mergers, corporate restructuring activities, maintaining broker/dealer operations and trading on their own accounts and offering advisory services to investors. It acts as an underwriter or an agent for corporations.

Issued Capital: That part of authorized capital that is actually offered to the public. The total number of issued shares outstanding in a company is most often shown in the annual report.

Joint Applications — Applications for IPO can be filled in single or in joint names (more than one person). In joint application, all payments will be made in favor of the first applicant.

Lead Manager: The investment bank in charge of setting the offering price of an IPO and allocating shares to other members of the syndicate. The lead underwriter will assess the company financials and current market conditions to arrive at the initial value and quantity of shares to be sold. They usually work with other investment banks to establish a syndicate, and thereby create the initial sales force for the shares that are sold to institutional and retail clients. Also called lead underwriter.

Listing: The process of making the securities officially quoted on the notified stock exchange for the trade. There are various standards that are established by stock exchanges (such as the NSE and BSE) to control membership in the exchange. Companies wishing to issue their stock on a given exchange are required to meet its listing requirements and must continue to do so for as long as they are on the exchange.

Lock-up period: The time period after an IPO when insiders at the newly public company are restricted by the lead underwriter from selling their shares. Usually lasts 180 days.

Market Capitalisation: The total value of the outstanding shares of a company, computed by multiplying the market price of the share and the total number of shares outstanding.

Merchant Bankers: They facilitate the issue process. The role of Merchant Banker is to direct and co-ordinate the activities with under writers, registrars and bankers. They assure investors of the soundness of the issue. They also help the companies/entrepreneurs/promoters to tap resources in conformity with SEBI guidelines.

Multiple Applications: Two or more applications submitted on a single name are considered as multiple applications. An applicant is supposed to submit only one application irrespective of the number of shares applied for. The applications submitted for both electronic and physical equity shares are considered as multiple applications.

Minimum Subscription: As per SEBI guidelines, a minimum of 90 per cent shares should be subscribed by the public before the issuing company starts allotment of shares.

Net Offer: The capital which would be raised from the public after allotting to promoters is called Net Offer.

New issue: Same as IPO

NSDL: National Securities Depository of India (NSDL) is one of the first depositories and the largest that was established in India , being backed by institutions of national stature. It performs the functions of holding securities in cash and other transactions related to securities. It can be compared to a Bank for keeping securities in the electronic form. It acts as an intermediary between the Registrar and the company for dematerialisation of shares.

Offering price: It is the price that the investors who have been allocated the shares in an IPO must pay. It is not the same as the opening price, which is the first trade price of a new stock.

Opening/Listing price: The price at which a new stock starts trading.. Also called the first trade price. Underwriters hope that the opening price is above the offering price, giving investors in the IPO a premium.

Order book: It is an 'electronic book' that shows the demand for the shares of the company at various prices.

Oversubscribed: It defines a deal in which investors apply for more shares than are actually available for sale. Usually a sign that an IPO is a good buy and will open at a substantial premium as excess demand of the securities is there in the market.

Paid up capital: It is that part of authorized capital that a company has issued in the market and received payment for.

Penalty bid: A fee charged to brokers by the lead underwriter for having to take back shares already sold. Meant to discourage flipping.

Preferential Shares: These are shares of a company that enjoy preferential treatment both with regard to payment of dividend and return of capital over other shares. That is they carry a fixed rate or amount of dividend and have a preferential right to be paid back the paid-up capital of a company in case of winding up. However, they do not have any ownership rights in the company.

Premium: Shares are said to be issued at a premium price when the company is able to sell them at a price which is above their face value.

Price Band: It is the spread within which investors can bid for shares of the issuing company under the book building process. Generally it is advisable to apply at the higher band as a lower band application may result in shares not being allotted. However, for some companies, the price at the higher band may not be attractive.

Primary Market: It refers to the set up which helps the industry to raise funds by issuing different types of securities. It performs the function of transfer of savings from individuals to companies, mutual funds and public sector undertakings. It can be made through: Prospectus, Offer for sale, Book building process, Private Placement.

Private Placement: It is a method of issue of securities in the primary market in which the issuing company does not offer the securities to investors in general, rather they are sold to selected big institutional clients only that may be selected in conformity with the merchant banker.

Prospectus: The document which explains all aspects of a company's business, including financial results, growth strategy and risk factors that has to be filed with Securities and Exchange Board of India (SEBI) announcing a company’s intent to go public.

Red Herring: The document which explains all aspects of a company's business, including financial results, growth strategy and risk factors that has to be filed with Securities and Exchange Board of India (SEBI) announcing a company’s intent to go public.

Registrar: An institution that plays an administrative role in conducting a public issue. It is responsible for collecting information from the collecting banks and reporting to the companies and lead managers about the issue collections. They advise the company regarding the closure or extension of closing date of the issue.

Registration Statement: A document that must be filed with SEBI before securities can be sold to the public. It describes the business of the issuer of the securities, how the proceeds of the offering will be used, audited financial statements, some background on the principal executives, and other pertinent data.

Rights Issue: Sale of new shares conducted by offering shares to existing shareholders in proportion to shares already held by them is termed as Rights Issue. Only the portion that is left after the subscription of the existing shareholders is offered to the general public.

Roadshow: A tour taken by a company preparing for an IPO in order to attract interest in the deal. It can be attended by institutional investors, analysts and money managers by invitation only. Members of the media are forbidden to be present in it.

Secondary Market: It is the network or system for subsequent sale and purchase of securities. Once securities are issued through IPO’s in the primary market, thereafter they can be purchased and sold in the secondary market only.

Selling stockholders: Investors in a company who sell part or their entire stake as part of that company's IPO. Usually considered a bad sign if a large portion of shares offered in an IPO comes from selling stockholders.

Stock exchange: It can be defined as a market which provides a platform for buying and selling of existing securities. It helps companies to raise finance, provides liquidity and safety of investment to investors and enhances credit worthiness of individual companies.

Syndicate: It is a group of investment banks that buy shares in an IPO to sell to the public The Book Running Lead Manager to the issue appoints the Syndicate Members and the syndicate is disbanded as soon as IPO is completed.

Under-Subscription: Shares are said to be under-subscribed when the number of shares applied for by the public are less than the shares actually offered to the public by the Company.

Underwriting: It is a process by which investment bankers provide a guarantee that issue of new securities will be fully subscribed. It is done by investment bankers who are so-called underwriters and they charge a commission called the underwriting commission for the service they provide.

Underpricing: The amount by which an IPO's first trade exceeds its offer price; it is an indication of the extent to which a company inappropriately priced its IPO.

Venture capital: It is the pre-IPO process of raising money for companies that is done only by accredited investors. It is a very important source of funding for startups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns.