Basics of Initial Public Offer (IPO)

What is an IPO?

• When a company wants to expand its business to new geographies, what does it need in order to expand its business? Of course, it needs Funds/Money which we can also say the Capital Requirement. There are various ways to raise capital. An initial public offering is one of the ways for a company to raise capital.
• Initial public offering (IPO) means the first time that a previously private company offers its equity shares to the general public. In Simple words, an Initial Public Offer (IPO) is when an unlisted company issues shares either by way of fresh issue of securities or by way of sale of existing securities to the public. The company's shares start trading on stock exchanges after it gets listed.
• IPOs are generally issued by companies in their growth stage to access more capital or by big private companies looking to get publicly traded or to get an exit route for the existing investors.

What is an IPO?

Types of Market

There are two types of Market Namely Primary Market and Secondary Market

• An IPO is the selling of securities to the public in the primary market. This means it is a direct deal between the company and the buyer or investor. In IPO the buyers can buy the shares from company but to sell the shares they have to wait until the company is listed on stock market.
• When the buying and selling of shares takes place between a buyer and a seller with the help of broker then it called as secondary market. Most trading of shares takes place in secondary market.

What is Book-Building Issue and Fixed Price Issue?

• Book Building is basically a process used in Initial Public Offer (IPO) for efficient price discovery. It is a mechanism where, during the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The offer price is determined after the bid closing date.

The Difference Between Book-Building Issue and Fixed Price Issue is:

Issue Type	Book-Building Issue	Fixed Price Issue
Offer Price	A 20 % price band is offered by the issuer within which investors are allowed to bid and the final price is determined by the issuer only after closure of the bidding.	Price at which the securities are offered and would be allotted is made known in advance to the investors.
Demand	Demand for the securities offered, and at various prices, is available on a real time basis.	Demand for the securities offered is known only after the closure of the issue.
Payment	Payment only after allocation.	Payment if made at the time of subscription wherein refund is given after allocation.
Reservations	50 % of shares offered are reserved for QIB's, 35 % for Non-Retail and 15% for Retail Investors.	50 % of the shares offered are reserved for applications below Rs. 2 lakh and the balance for higher amount applications.

What are Different Categories of Investors in IPO?

Investors can apply for Shares in an IPO in Different Categories:

• Qualified Institutional Bidders (QIB’s): Financial Institutions, Banks, FII's and Mutual Funds who are registered with SEBI are called QIB's. They usually apply in very high quantities. QIBs are mostly representatives of small investors who invest through mutual funds, ULIP schemes of insurance companies and pension schemes. 50% of the Offer Size is reserved for QIB's. The Allotment basis is Proportionate.

• Retail Individual Investors (RII): In retail individual investor category, investors can not apply for more than Rs two lakh (Rs 2,00,000) in an IPO. Retail Individual investors have an allocation of 35% of shares of the total issue size in Book Build IPO's. NRI's and HUF who apply with less than Rs 2,00,000 /- are also considered as RII category.

• Non-Institutional Bidders/Investors (NII): Resident Indian individuals, Eligible NRIs, HUFs, companies, corporate bodies, scientific institutions, societies and trusts who bid for more than Rs 2 lakhs are known as Non-institutional bidders. They need not to register with SEBI like RII's. Non-institutional bidders have an allocation of 15% of shares of the total issue size in Book Build IPO's.

• High Networth Individuals (HNI): If retail investor applies more than Rs 2,00,000 /- of shares in an IPO, they are considered as HNI.

What is Market Lot Size and Minimum order quantity?
The two important factors that an investor should be aware of are Market Lot Size and Minimum Order Quantity. As the name suggests, Minimum Lot Size is defined as the minimum count of shares the investor can apply for while bidding in an IPO. If investor wants to bid for more shares, they can apply in multiples of IPO market lot (lot Size or IPO bid lot) of shares. Let’s take an example,

IPO: XX Limited,
Public Issue Price: Rs.40/- to Rs.50/- Per Equity Share
Market Lot: 125 Shares
Minimum Order Quantity: 125 Shares

The investor can apply in this IPO as below:
At Rs 40/- * 125 Shares * 1 Lot = Rs 5000/-
At Rs 40/- * 125 Shares * 2 Lot = Rs 10000/-
At Rs 40/- * 125 Shares * 18 Lot = Rs 90000/-
At Rs 50/- * 125 Shares * 2 Lot = Rs 12500/-
At Rs 50/- * 125 Shares * 1 Lot = Rs 6250/-
At Rs 50/- * 125 Shares * 15 Lot = Rs 93750/-

What is the difference between IPO issue price and listing price? 

• The issue price of an IPO is the price at which a company sells its shares. The IPO is then listed in exchange. The listing price is the opening price of the share on the listing day. Demand and supply for the shares is a major factor in difference between issue and listing price. If there is huge demand but less supply then the listing price is higher than issue price and if it low then the listing price will be less than issue price.

What is Grey Market and Grey Market Premium?

• The grey market is a term people use in the IPO market. It means the stock of the company that came up with the IPO bought and sold outside the stock market. The grey market is unofficial but to get the fixed gain of the stock one can buy or sell its IPO application. 
• The grey market works before the IPO listing and during the days of the IPO start and the allotment. And because these pre IPO Market is unofficial, it means there is no rules and regulations to control this grey market
• Grey Market Premium is something that is easy to understand. It is the premium amount at which shares and application are bought and sold before they are available on the stock exchange
• The IPO market is streaming at high today. The NSE and BSE IPO grey market premium has a significant role in determining the subscription.
• The grey market premium is an over the counter or unofficial market. Here the new shares or the shares of the company bringing the IPO are bought and sold even before their listing on any of the exchange. In fact, the grey market assists in price discovery of the stock.
• The premium can be positive and negative depending on the demand and supply of shares. If the premium is high, more investors will apply for IPO. On the other hand, if the premium is low or negative, fewer investors will apply for the IPO.

What are Kostak rates?

• Kostak (or price of application) is the premium amount in rupees at which IPO applications are being traded in IPO Grey Market. Usually ‘Kostak' value is defined as the premium of a maximum lot retail application in an IPO.
• Kostak price is important mostly before issue is close for subscription and final bidding status is available to the IPO investors. Very few IPOs applications are traded after final bidding status is available to the investors.
• ‘Kostak' is especially for people who do not want to take risk with IPO allotment or listing gains.

Minor difference between Kostak and GMP.

• The rate at which one gets premium by selling his/her shares which are allotted in IPO application in the grey market is called Kostak.
• The premium which is generated in this Grey market by this trading is called GMP (Grey Market Premium). GMP is useful to estimate the opening price of the IPO while listing. 

What is Subject to sauda?

• In case of 'Subject to Sauda' deal, while selling IPO application in the grey market, buyer and seller agree that deal is only valid if the seller will get the allotment. If the seller doesn't get any shares in IPO process, the deal gets void. 
• If someone buys an IPO on the subject to sauda price this means they will get the said amount. In this one cannot fix their profit as it depends on the allotment. Again if one get an allotment and he or she sold the application around Rs.10000 and the profit goes high on listing day around Rs.15000 then one should pay Rs.5000 to the guy who bought the application.
• In simpler words, it is a kind of deal in IPO grey market in India. Unofficially, an investor can sell an IPO Application to a buyer at an agreed price (Kostak Rate) before IPO Shares are listed in the stock market. If the seller gets an allotment, he will get Rs 5000.

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