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

As many companies prepare for an initial public offering (IPO), terms such as ASBA, bookbuilding, anchor investors, and the like will be encountered over the next few days. Here we deal with five such terms from the IPO lexicon.

Bookbuilding/Fixed Price Issuance: As the name suggests, in a fixed price IPO the price at which shares will be issued to investors is fixed in advance. In today’s common bookbuilding issue, the IPO announces a price range – the purpose is pricing by bids rather than a fixed price. Investors place bids on how many shares they want to buy and at what price (within the price range). After the bidding is complete, the highest price bid at which the cumulative share demand equals the total number of shares offered becomes the cutoff price. The shares are allocated at this price. All applicants submitting prize bids equal to or greater than this prize will be eligible for allocation. According to Aditya Kondawar, partner and vice president of key accounts at Complete Circle Capital, only retail investors, employees and existing shareholders have the ability to tick “cut off price” and also make specific price bids. The selection “cut-off price” ensures that these investors remain entitled to an allocation regardless of the finally determined cut-off price. Other categories of investors are required to bid and cannot simply select ‘discount price’.

ASBA or Blocking Amount Assisted Application: When you apply for an IPO, under ASBA the bank merely blocks the application amount in your account until the time of the allotment. “The money is only deducted from your account when you are allotted shares, and if no allotment is made, the money is released,” says Kondawar. Meanwhile, the money in the bank account continues to earn interest.

Anchor Investors: These are large institutional investors such as sovereign wealth funds and domestic mutual funds participating in an IPO. You are offered shares in an IPO before it is opened for subscription by others. The shares will be allotted one day prior to the start of the IPO at a price set by the company. Anchor investors must at least invest 10 crores. They support or anchor the issue by underwriting it, and their participation is often seen as a sign of confidence in the issue by retail investors. Under Sebi’s rules, they are subject to a 30-day vesting period for half of the shares awarded to them and a 90-day vesting period for the remaining portion from the date of grant.

Offer for Sale versus Fresh Issue: An IPO can be a Fresh Issue only or an Offer for Sale (OFS) or a mix of both. If it’s a new issue, it means a company is raising capital by issuing fresh shares to investors. The company can use this for various purposes such as capital investment, loan repayments, etc. An OFS simply means that company founders or other existing investors (e.g. private equity investors) sell their shares in their company. In this case, the money goes to the selling shareholders and not to the company. A new issue leads to an increase in the number of shareholders and thus to a dilution of earnings per share (EPS). An OFS only transfers ownership from one group of shareholders to another and does not result in EPS dilution.

Green shoe option: A company going public has the option of issuing additional shares to investors than originally planned if the issue is oversubscribed. It is also referred to as an over-allotment option. For investors, this means a higher chance of being allocated shares than would otherwise have been possible. You can find out whether an issue has a greenshoe option or not in the IPO prospectus. Upon exercise of this option, no new shares will be issued and the additional shares allotted to investors will be borrowed from the company’s founders.

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