Initial Public Offering (IPO) is a process of selling new shares to the investors for the first time. Companies raise IPO in order to raise funds with an aim to expand business.
Once the company issues IPO, the shares can be freely traded on stock exchanges.
Recently, Inter Globe Aviation, Cafe Coffee Day came up with IPO and now are listed on the BSE and NSE.
Here are 6 must-know terms in an IPO:
1) Book Building
Book building is the price discovery mechanism for the issued shares when a company plans to raise capital. During the process, shares can be allotted to investors at a fixed price or investors can be provided a price band for making their bids.
And based on the demand and supply for the shares in the market, cut-off price or the issue price for the floated shares is determined.
2) Cooling Off period
The time period between the filing of the registration statement with Securities Exchange Board of India (SEBI) and the offer of those securities to the public.
Cooling off period will be usually about 20 days. During this time, the syndicate and selling group members distribute notifications and consider indications of interest from interested customers.
3) Red Herring Prospectus
This is a initial draft offer document, which does not have details of the price or number of shares being offered or the amount of issue.
4) Syndicate Member
The Syndicate Members are those who collect the bid forms in a book-built issue. The Book Runner(s) appoints intermediaries who are registered with the Board and who are permitted to carry on activity as an ‘Underwriter' as Syndicate Members.
5) Lead Manager
In the per-issue process, the Lead Manager, is responsible for due diligence of company's operations/ management, business plans, legal etc.
Documents, Prospectus, statutory advertisements and memorandum containing salient features of the Prospectus are also designed by lead manager.
Underwriters are in-charge of organizing the syndicate, distributing member participation shares and making stabilizing transactions.
The lead underwriter's can be banker, broker, merchant banker or a financial institution.