IPO season is upon us– Here are five terms you should know

Book building/ fixed price issue: As the name suggests, in a fixed price IPO, the price at which shares are issued to investors is fixed upfront. In a book building issue, which is what is common these days, the company going public announces a price band – the purpose being price discovery through bidding rather than a fixed price. Under this, investors submit bids for the number of shares they would like to buy and at what price (from within the price band). After the bidding is complete, the highest price bid at which the cumulative demand for shares matches the total shares on offer becomes the cut off price. Share allotment happens at this price. All applicants who put price bids equal to or greater than this price become eligible for allotment. According to Aditya Kondawar, partner and vice president of Key Accounts at Complete Circle Capital, only retail investors, employees and existing shareholders have the option of ticking ‘cut off price’ and also placing specific price bids. Selecting ‘cut off price’ ensures that these investors remain eligible for allotment irrespective of the cut off price that is finally arrived at. Other categories of investors have to place price bids and cannot simply select ‘cut off price’.

ASBA or application supported by blocked amount: Under ASBA, when you apply to an IPO, the bank merely blocks the application amount in your account till the time of allotment. “The money gets deducted from your account only if you are allotted shares and in case of no allotment, the money gets unblocked,” says Kondawar. Meanwhile, the money in the bank account continues to earn the interest.

Anchor investors: These are large institutional investors such as sovereign wealth funds and domestic mutual funds participating in an IPO. They are offered shares in an IPO even before it opens for subscription to others. The shares are allotted a day before the IPO opens, and at a price fixed by the company. Anchor investors must invest a minimum of ₹10 crore. They provide support to or anchor the issue by subscribing to it and their level of participation is often looked upon by retail investors as a sign of confidence in the issue. Under Sebi regulations, they are subject to a 30-day lock-in for half of the shares allotted to them, and a 90-day lock-in for the remaining portion, from the date of allotment.

Offer for sale versus Fresh issue: An IPO can be solely a fresh issue or an offer for sale (OFS), or a mix of both. When it’s a fresh issue, that means a company is raising capital by issuing fresh shares to investors. The company can use this for various purposes such as capital investment, repayment of loans etc. An OFS simply means that company promoters or other existing investors (such as private equity investors) are selling their shares in their company. In this case, the money goes to the selling shareholders and not the company. A fresh issue results in an increase in the number of shareholders and so, a dilution of EPS (earning per share). An OFS only transfers ownership from one set of shareholders to another and does not lead to EPS dilution.

Green shoe option: Under this, a company going public has the option of issuing additional shares to investors than originally planned, in case the issue gets oversubscribed. It is also referred to as an over-allotment option. For investors, this implies a higher chance of being allotted shares than would have been possible otherwise. You can check the IPO prospectus to find out if an issue has a green shoe option or not. No fresh shares are issued when exercising this option and the additional shares allotted to investors are borrowed from the company promoters.