IPO guidelines for beginners

• Retail investors - individuals like you.
• Non qualified Institutional investors - This category includes corporate, trusts, societies, NRIs etc
• Qualified Institutional Investors (QII) - This category includes financial institutions listed as QII by SEBI, which includes financial institutions as banks, brokerages and foreign institutional investors (FII)

• Issue price - This is the price of one share offered in the IPO as fixed by the company - it is the price the shares begin their life on the stock market with. Two types of pricing options can be involved:
• Fixed price - The price is fixed before the IPO opens.
• Book building - The price is arrived at after the IPO opens, free market style, depending on the demand for the shares offered.
• Float - This refers to the amount of stock that is made public through the IPO. This is the stock that circulates through trade on share markets. Not all of the shares of a company get listed on the market - it’s usually a small proportion.

Types of IPOs

IPOs are how companies get listed on stock markets. To get in on the action, you must be familiar with the IPO investment tips and strategies. You should also know the different types of IPOs there are which is why we’re here to discuss every detail.

• Fixed Price Issue : In a Fixed Price Issue, the price of the offerings is evaluated by the company along with their underwriters. They evaluate the company's assets, liabilities, and every financial aspect. They then work on these figures and fix a price for their offerings. The price is fixed after considering all the qualitative and quantitative factors. In a fixed price issue, the fixed price may be undervalued during the company’s IPO. The price is mostly lower than the market value. As a result, investors are always very interested in fixed price issue and ultimately revalue the company positively.
• Book Building Issue : A book building issue is a comparatively new concept in India compared to other parts of the world. In a book building issue, there is no fixed price, but a price band or range. The lowest and the highest price is called ‘floor price’ and ‘cap price’ respectively. You can bid for the shares with the desired price you would like to pay. Thereafter the price of the stock is fixed after evaluating the bids. The demand of the share is known after each day as the book is built. An IPO can be done through Fixed Price Issue or Book Building Issue or a combination of both.

• Price : The price of the share is fixed on the first day of the listing in fixed price issue and is printed in an order document whereas, in book building issue only the price band is fixed initially, the exact price is not fixed. Only after the closing date of bid, the exact share price is fixed.
• Demand : The demand in a fixed price issue is known only after the closing of the issue whereas, in a book building issue, the demand for the share is known after each day.
• Payment : In a fixed price issue, you need to pay 100% of the price of the share at the time of bidding for the share, but in case of book building issue, the payment can be completed after the allocation.

IPO allotment basics

The IPO allotment process is fairly simple. Investors place bids for shares. If shares are offered at a particular fixed price (issue price), then all bids are made at that price. However, share price can also be fixed or discovered after assessing demand for the stock by the book building process.

In the book building process, bids are placed within a price range and finally a price is fixed. All of the bids at the fixed price and above get shares. Thus, if you think that there are chances that a particular IPO might be in a high demand, i.e. the IPO might be over-subscribed; it's always prudent to bid for shares at the cut off price. If you choose the cut off price option while bidding for shares, you will get shares at the cut off price determined later on.

But, what happens when more number of bids is received than there are shares? The company then divides up the shares among bidders.

It is said an IPO oversubscribed when the number of shares that investors want to buy is higher than the number of shares available in the stock exchanges. To put it simply, oversubscription occurs when the number of shares supplied by a company is not enough to meet the demand.

When a company decides to go public, underwriters assess the market to gauge the potential interest of the investors. During this process, there is always a chance of underwriters underestimating the interest in the IPO and price it lower than the market would actually pay for. This result in the demand for shares exceeding the number of shares issued. For example, a fixed number of shares offered in an IPO is, say, 10,000 shares. A ten-time oversubscription means investors’ demand is about one lakh shares. If the demand for an IPO exceeds the supply, the issuing house can charge a higher price resulting in more capital raised for the issuer.

In this scenario, underwriters can exercise the greenshoe option. The greenshoe option allows underwriters to issue 15% more shares than officially planned.

Every subscriber has encountered a situation where an IPO oversubscribed. So, let’s take a look at how companies allot shares in such times.
The allotment of shares is done by predefined rules laid down by Securities and Exchange Board of India (SEBI).
In every IPO, investor categories are distinguished and a percentage of shares are allotted to every category.

• Qualified institutional investors
• Non-institutional investors
• Retail investors (who have invested less than Rs 2 lakh)
• There could be an employee’s category as well.

The process of allocating shares is different for every investor category. While 50% of shares are allocated to qualified institutional investors, nearly 35% of the shares are allotted to retail investors.