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FAQs on Initial Public Offering (IPO)

Q1. What is an IPO?

Initial Public Offering (IPO) is an offer made by an unlisted company of the fresh issue of securities or existing securities for sale or both for the first time to the public. It can also be said as a process by which a private company becomes a listed company.

Q2. What type of instruments are offered by the IPOs?

Initial Public Offering of the following financial instruments are offered-

  • Equity shares
  • Non-convertible debenture
  • Bonds

Q3. How can one apply for an IPO?

  1. Physical Application:

An investor needs to first obtain an IPO application form through a share broker, an investment consultant or from the collecting banks. The investors are required to fill up the form and give the amount after calculating the number of shares applied for in the bank, which has been designated as a collecting center for the particular IPO.

  1. Apply online:

To apply in IPO’s online an investor has to have a Demat account which provides this facility. There is almost no paperwork involves in applying IPO’s online.

  1. ASBA Process:

Applications Supported by Blocked Amount (ASBA) Process, is the alternative payment method (optional) for IPO application where the IPO bidding amount remains in investors account but blocked by the bank until allotment is done. It’s available only for retail individual investors through participatory banks (SCSB’s).

Q4. What is the minimum number of days for which bid should remain open in book building?

The book should remain open for a minimum of 3 working days.

Q5. What is a price band?

The price band is a band of price within which investors can bid. The spread between the floor and the cap of the price band shall not be more than 20%. The price band can be revised. If revised, the bidding period shall be extended for a further period of three days, subject to the total bidding period not exceeding thirteen days.

Q6. What is a bid lot?

A Bid-lot is the pre-determined number of shares which have to be applied for by an investor. It is different for each issue. There is a minimum lot size which is pre-decided by the company and mentioned in the application form. Eg: Minimum bid lot in IPO of XYZ co. – 10 Bid-lot Multiples of 10 Price Band – 100-120. It means that a retail investor cannot apply for less than 10 shares in that particular issue. The application for more than 10 shares has to be in multiples of 10 like 20, 30, 40, etc

Q7. What is the floor price in case of book building?

The floor price is the minimum price at which bids can be made.

Q8. Can the Individual Investor use book building facility for making an application?

Yes.

Q9. Can more than one issue be held simultaneously?

Yes.

Q10. Can the bidder revise his bids?

Yes.

Q11. Is it possible to enter bids less than floor price?

No. The system automatically rejects the bids if the price is less than floor price.

Q12. What are the different categories of investors?

Investors are broadly classified under following categories:

  1. Retail individual Investor (RIIs)
  2. Non-Institutional Investors (NIIs)
  3. Qualified Institutional Buyers (QIBs)

Q12. What is the time deadline for which the allotment process would be completed?

As per current norms, the newly issued share has to be listed on or before the 12th working day after the issue is closed. Working backward, this would generally mean that the allotment process and uploading of the shares, sending of refunds etc. have to be completed within 10 working days from the date of closure of the issue.

Q13. What is the time frame for which the refund order would be dispatched?

As per current norms, the newly issued share has to be listed on or before the 12th working day after the issue is closed. Working backward, this would generally mean that the allotment process and uploading of the shares, sending of refunds etc. have to be completed within 10 working days from the date of closure of the issue.

Q15. What is a cut-off price?

A retail investor can bid at any price within the price band or can bid at cut-off. “Cut-off price” means the investor is ready to pay whatever price is decided by the company at the end of the book building process. While making the application at Cut off, the investor is required to pay the amount at the highest price band. The excess amount, in case the price discovered, is lower, is refunded. The cut-off option can be exercised only by Retail Individual Investors (RIIs) and Employees of the issuing company applying in the Employee Category.

Q16. How much tax one has to pay on returns (capital gains) for a particular IPO?

If an investor sells IPO allocated shares within 12 months of IPO Allotment, he comes under short-term capital gains and all such gains are taxed.

Q17. Can one make more than 1 application of the same issue?

No, you can make only 1 application for an issue. If you have made more than 1 application then your application will get rejected. If more than one applications are detected under a PAN in an IPO, all applications are liable to be rejected.

Q18. What proof can bidder request from a trading member for entering bids?

Whenever a bid is entered by trading members into the system, a unique transaction registration slip is automatically generated. Transaction registration slip gives details regarding a number of shares bid for, price, the client name etc.

 

Pragati Rajoria

Pragati Rajoria

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About Me

I’m a Commerce Graduate & CFP Professional, engaged in blogging since 3 years. I’m not affiliated with any financial product. The purpose of writing blog is to spread financial awareness and help people in achieving excellence for money. Please note that the views expressed on this Blog/Comments are clarifications meant for reference and guidance of the readers to explore further on the topics. These should not be construed as investment advice or legal opinion.

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