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Frequently Asked Questions On IPOs

This blog will answer popular questions about IPOs. Find out whether you should invest in IPOs or if other investment options like mutual funds, stocks, and alternative investments are better for you.
December 1, 2020

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Initial Public Offerings or IPOs have become a regular affair in the Indian financial market over the past 2 decades. Since 2008, India has seen the 164 IPOs out of which 100 are currently trading below their issue price.


But if you’re an investor interested in the benefits of an IPO and want to know more about IPO FAQs, this blog is for you. Let’s take a look at the meaning of an IPO through an interesting example. 


More from our IPO series:


1. How to invest in an IPO online?

2. List of current & upcoming IPOs of 2020 in India

3. 7 best IPOs of the year 2019 in India


What Is An IPO?


An Initial Public Offering or an IPO, as it is commonly referred to, helps private companies go public. During an IPO, the company will offer a piece of its business in the form of shares to investors outside the company. The company gets listed on the stock exchange after an IPO. This can help the company get more capital investment to help their business grow.

Going public is not easy. Read more about the intermediaries involved in the launch of an IPO here.

Imagine this: There’s a family-run bakery that only has the capacity to maintain 1 store. At most, the bakery can get friends on board as investors to expand the business to 1 more shop.


But the biggest bakeries in the world, as the term suggests, are all over the world. To scale to that size, the family-run bakery must get more investors on board. 


The bakery can fuel their dreams of global expansion through an Initial Public Offering (IPO). The IPO will allow them to offer a piece of their business, known as a share or stock, in exchange for more capital from several investors. 


Offering an IPO will allow the bakery to 'go public' and get listed on the stock exchange. The bakery can issue the IPO shares in one of 2 ways:


  1. Fixed Price
  2. Book Building


What is the Difference Between Book Building Issue and Fixed Price Issue?


Fixed Price IPOs


1. The company decides a fixed share price that investors are privy to beforehand.

2. The investor has to pay for all the 'applied' shares at once. 

3. The investor receives the balance money if the allocated shares are less than the applied shares.


Fixed Price IPOs offer investors the advantage of knowing the price of the stock they are about to buy. But a book building IPO is different. 


Book Building IPOs


1. The company offers a price range for the IPO shares to investors. 

2. Investors are asked to bid on the shares.

3. The price of the share is decided after a bidding process. 

4. The company builds its book based on the bids. 


To bid, the investor must decide the number of shares and the price they are willing to pay. This can be tricky for investors because there are multiple unknowns involved: The final issue price and the number of shares allocated.


Investors need to be aware of two terms since there is a price range involved in book building:


1. Floor price.

2. Cut-off price.


What is the Difference between Floor Price and Cut-Off Price for a Book Building Issue?


Floor Price


This is the lowest value in the price range offered by the company for its IPO.


Example (in bold) : 99-999.


Cut-off Price


This is the highest value in the price range offered by the company for its IPO.


Example (in bold) : 99-999.


What is the Difference Between RII, NII, QIB, and Anchor Investor?


Investors are allowed to invest in an IPO under 4 categories (conditions):


1. Retail Individual Investor (RII)


Investors who can bid on the IPO:


  • Resident Indians
  • Non-resident Indians (NRIs)
  • Hindu Undivided Families (HUFs)


Finer details:


  • 35% of the IPO issue is reserved for the RII category
  • Maximum investment amount: ₹200,000
  • RIIs can bid at the cut-off price
  • RIIs can decide to withdraw their bid until the day of allotment 


2. Non-institutional Investor (NII)


Investors who can bid on the IPO:


  • NIIs are RIIs who want to invest more than ₹200,000
  • Resident Indians
  • Non-resident Indians (NRIs)
  • Hindu Undivided Families (HUFs)
  • Corporate bodies and companies
     
  • Science institutions 
  • Societies and Trusts


Finer details:


  • Approximately 15% of the IPO issue is reserved for the NII category
  • NIIs do not have to register with SEBI
  • Maximum investment amount: ₹200,000
  • NIIs can not bid at the cut-off price
  • NIIs can decide to withdraw their bid until the day of allotment 


3. Qualified Institutional Bidder (QIB)


Investors who can bid on the IPO:


  • Mutual funds 
  • Public institutions
  • Foreign Portfolio investors 
  • Commercial banks


Finer details:


  • Approximately 50% of the IPO offer size is reserved for the QIB category
  • QIBs must register with SEBI
  • QIBs can not bid at the cut-off price
  • QIBs can not withdraw their bid after the close of IPOs 

4. Anchor Investor


Investors who can bid on the IPO:


  • QIBs who apply for more ₹10 Cr investment in the IPO 


Investors who cannot bid on the IPO:


  • Merchant bankers 
  • Promoters 
  • The relatives of merchant bankers and promoters


Finer details:


  • Approximately 60% of the QIB category is reserved for Anchor Investors
  • The offer price of AIs is decided separately
  • Bid and Offer period varies for AIs
  • AIs can not bid at the cut-off price
  • 15 Anchor investors for offer size less than ₹250 Cr
  • No cap for the number of Anchor Investors above offer size more than ₹250 Cr


Can You Sell The Stock Allotted To You In An IPO Before The Stock Gets Listed?


The current rules and regulations prohibit investors from selling the allotted stocks of an IPO before the stock gets listed. 


But on the day the IPO is listed, you can:

  • Sell 50% of the allotted shares if and when the listing price returns 40-50% gains
  • Sell 100% of the allotted shares: if the listing price returns more than 70% gains



Summary


The IPO FAQs indicate that there are several terms and trends that an investor must keep up with even before they invest in an IPO. But just like any other investment, IPOs have their own share of benefits. 


However, there are potentially less volatile options that you can invest in like:


  1. Equity Funds
  2. Debt Funds
  3. Large Cap Stocks
  4. Mid Cap Stocks
  5. Small Cap Stocks
  6. US Stocks
  7. Alternative Investments


These investment options offer similar benefits to an IPO. At the same time, these are tried and tested options that have a historical track record of performing for their investors.


But before you invest in any investment option, it is important to know if the investment itself is suitable for your goals and risk appetite. So speak to a wealth coach today to know more about investing in options better than an IPO.


You can even download the 4.5 stars rated Cube Wealth app to explore on your own.



Shriram Shekhar
Shriram is a Consultant at CubeWealth. He has developed cutting edge IT products for over 2 years before turning to his passion for the written word. His love for philosophy, developing products, and empowering people through quality content is what got him to CubeWealth.

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