Introduction

Investing in an Initial Public Offering (IPO) can be an exciting gateway to owning a stake in a company at an early stage of its journey in the stock market. It’s a unique opportunity where private companies go public, offering shares to the general public for the first time. However, beneath the buzz and headlines lies a world of financial terminology that can be overwhelming, especially for new investors.

To truly capitalise on the potential of an IPO, it’s crucial to understand the key terms that shape every step of the process, from tracking upcoming IPOs and reviewing the red herring prospectus to placing your bid during the IPO application process. Each term carries specific importance and can significantly influence your investment decisions.

Whether you’re aiming to evaluate the company’s fundamentals, decode financial metrics, or simply want to ensure that your application is successful, being familiar with essential IPO terminology can boost your confidence and clarity. In this guide, we’ll walk you through the most important IPO-related terms every investor should know so you can navigate the IPO market like a pro.

Understanding Upcoming IPOs: A Guide to Staying Ahead

Investing in an IPO can be an exciting opportunity to get in early on a company’s growth journey. But timing and research are crucial. Tracking upcoming IPOs allows investors to prepare in advance, study the issuing company in detail, and plan their investments strategically.

Why Should You Track Upcoming IPOs?

Knowing about upcoming IPOs ahead of time gives you a valuable edge:

• Time for Research: Early awareness lets you evaluate the company’s fundamentals and growth prospects.
• Capital Planning: You can set aside funds to participate without affecting your regular investment plans.
• Informed Decision-Making: Instead of rushing at the last moment, you can calmly assess if the IPO suits your risk profile.

How Do Companies Announce an Upcoming IPO?

When a company plans to go public, it begins the IPO process by:

1. Filing a Draft Red Herring Prospectus (DRHP) with the Securities and Exchange Board of India (SEBI).
2. Once SEBI reviews the draft, the company issues a final Red Herring Prospectus (RHP).
3. The company then announces the IPO opening and closing dates, price band, issue size, and lot size.

Companies publish all this information on platforms like the NSE, BSE, SEBI, and financial news outlets to make it accessible to the public.

The Role of the Red Herring Prospectus (RHP)

The Red Herring Prospectus is your go-to document for IPO research. It provides:

• Detailed financials – including income statements, balance sheets, and cash flows for past years
• Business overview – how the company operates, its products, services, and industry
• Risk factors – regulatory, operational, and market-related risks that could affect performance
• Objectives of the issue – The company explains how it will use the funds raised, such as repaying debt, expanding operations, or meeting working capital needs.
• Promoter and management team – background of key people behind the business
• Valuation metrics – including peer comparison, EPS, P/E ratio, and return ratios

Reading the RHP thoroughly helps investors make fact-based decisions rather than relying on market hype or grey market premiums.

IPO Prospectus: The Investor’s Guide

Before investing in an IPO, one of the most important steps is studying the IPO prospectus. This document acts as a comprehensive guide for investors, offering deep insights into the company’s financial health, plans, industry position, risks, and more. Think of it as your research report before committing your money to the company’s shares.

The prospectus primarily comes in two key versions, each serving a specific purpose:

Red Herring Prospectus (RHP)

The company files the Red Herring Prospectus as a preliminary document with SEBI (Securities and Exchange Board of India). The company provides most of the vital information investors need, such as its financial performance, business model, industry outlook, key risks, and plans for using the raised capital, but excludes the final IPO price and the number of shares being offered.

Investors use the RHP to:

• Understand the company’s growth strategy and operations
• Assess financial metrics like revenue, profit margins, and debt levels
• Analyse potential risks and competitive strengths
• Compare the company with peers in the industry

Reviewing the RHP is essential for making an informed bid during the IPO.

Abridged Prospectus

The Abridged Prospectus is a shortened version of the full prospectus, designed to save time for investors who want a quick overview. It highlights key points such as:

• The issue size (how much capital is being raised)
• The price band (range within which investors can bid)
• Business objectives (what the company plans to do with the IPO funds)
• A summary of key risks involved in investing

While the Abridged Prospectus is helpful for a quick understanding, it’s always a good idea to refer to the RHP for a detailed analysis before investing, especially in large or long-term IPOs.

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How the IPO Application Process Works

Investors can participate in an IPO through the IPO application process, which involves:

1. Applying via ASBA (Application Supported by Blocked Amount): This ensures that the investor’s funds remain in their bank account until shares are allotted.
2. Bidding at the Cut-off Price: Retail investors often choose this option in a book-building IPO to improve their chances of allotment.
3. Selecting the Right Investor Category: IPOs are open to different investor classes, including retail investors, high-net-worth individuals (HNIs), and institutional investors.

Understanding the IPO application process helps investors avoid common mistakes and enhances their chances of securing shares in a promising offering.

Bidding Process in an IPO: How It Works

The bidding process is one of the most crucial phases in an Initial Public Offering (IPO). During this stage, investors submit their interest in buying shares and help determine the final allotment price. This process plays a key role in price discovery, allocating shares fairly, and measuring market demand.

There are primarily two types of IPOs: fixed price and book-building, but most modern IPOs in India follow the book-building method, which is more dynamic and investor-friendly.

 Book-Building Method Explained

Price Band Announcement:

The company, in consultation with underwriters, sets a lower and upper limit (e.g., ₹150–₹160) for the IPO price.

Investor Bidding:

Investors (both retail and institutional) can place their bids at any price within this band. They must also specify the number of shares they wish to buy.

Demand Aggregation:

After collecting all the bids, the issuer and lead managers analyze the demand at various price levels. They refer to this process as building the book.

Price Discovery & Finalisation:

The issuer and lead managers analyze the demand data and determine the cut-off price—the final price at which they will issue the shares.

Allotment:

• If demand is higher than the number of shares available (oversubscription), investors may receive partial allotment or shares on a proportionate basis.
• Retail investors can also choose the “cut-off” option, which allows them to apply without selecting a specific bid price. This ensures they are considered at the final issue price.

Book-Building IPO vs. Fixed-Price IPO

A book-building IPO offers flexibility by allowing investors to bid at different prices, whereas a fixed-price IPO has a predetermined price. The book-building issue ensures market-driven pricing, making it a preferred option for both issuers and investors.

Key differences:

Comparison Table: Book-Building IPO vs. Fixed-Price IPO

For investors looking to participate in upcoming IPOs, understanding these differences is crucial.

Book-Building Issue: How the Final Price is Set

In a book-building issue, the final offer price is determined after analysing investor demand. The process includes:

1. Bidding Closure: Once bidding ends, the demand at each price level is reviewed.
2. Cut-off Price Finalization: The highest price at which shares can be allotted to maximise demand is selected.
3. Allotment and Refunds: If investors bid below the cut-off price, they do not receive shares, and the company refunds their funds.

This approach lets the market determine a fair price for the IPO based on actual investor interest.

Conclusion

Understanding IPO terminology is essential for making informed investment decisions. From the IPO prospectus to the book-building process, knowing these terms helps investors navigate the IPO application process effectively. With numerous upcoming IPOs in the pipeline, staying informed about concepts like ASBA, basis of allotment, and book-building method can give investors an edge.

At Jainam Broking Ltd., we empower investors with in-depth research, expert insights, and seamless trading platforms to help them make informed IPO investment decisions. By mastering these key IPO terms, investors can avoid common pitfalls, maximise opportunities, and enhance their financial journey with confidence.

So, are you planning to apply for IPO? If yes, you are at the right place! 

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