IPO and its Jargons: Essential Terms Every Investor Should Know

Welcome to IPOReporter.in! Navigating the world of Initial Public Offerings (IPOs) can be exciting but also a bit confusing with all the specialized terms involved. This blog aims to simplify these key terms so you can feel more confident in your investment decisions. Whether you’re new to investing or have some experience, understanding these essential IPO jargons will help you better grasp the IPO process. Let’s break down these important terms together.

IPO (Initial Public Offering): An IPO is the process by which a private company offers its shares to the public for the first time. This transition from private to public allows the company to raise capital from a broader pool of investors. It provides an opportunity for public investors to participate in the growth of the company. The funds raised are typically used for expansion, debt reduction, or other corporate purposes. An IPO can significantly increase the company’s visibility and credibility.

DRHP (Draft Red Herring Prospectus): The Draft Red Herring Prospectus (DRHP) is a preliminary document filed with the securities regulator by a company planning to go public. It contains detailed information about the company’s business operations, financial status, and the IPO’s purpose. The DRHP is used to gauge investor interest and receive regulatory feedback. It is an essential step in the IPO process, ensuring transparency and compliance with regulatory requirements.

RHP (Red Herring Prospectus): The Red Herring Prospectus (RHP) is the final prospectus issued by a company before its IPO. It includes updated financial statements and details about the offering, such as the number of shares to be issued and the price band. The RHP provides potential investors with comprehensive information to make informed investment decisions. It marks the transition from the planning phase to the active marketing and sale of shares.

Anchor Allocation: Anchor Allocation refers to shares reserved for anchor investors, who are institutional investors invited to subscribe to an IPO before it opens to the public. These investors, such as mutual funds and pension funds, provide stability and confidence in the offering. Anchor investors typically commit to holding the shares for a specified period, ensuring a strong initial demand and setting a positive tone for the IPO.

Subscription: Subscription refers to the process where investors apply for shares in an IPO. It indicates the level of interest and demand for the shares being offered. Subscription levels are categorized by investor types, such as QIBs, NIIs, and RIIs. High subscription rates, especially multiple times the number of shares available, suggest strong market interest and confidence in the company. It is a critical factor in determining the success of an IPO.

QIB (Qualified Institutional Buyer): Qualified Institutional Buyers (QIBs) are a category of investors that include entities such as mutual funds, banks, and insurance companies. They are considered to have the necessary expertise and financial strength to participate in the securities market. In IPOs, a portion of shares is often reserved specifically for QIBs, who can participate without the same regulatory constraints as retail investors. Their involvement can provide stability and credibility to the IPO process.

NII (Non-Institutional Investor): Non-Institutional Investors (NIIs) are individual or corporate investors who apply for shares worth more than ₹2 lakhs in an IPO. Unlike QIBs, NIIs are not institutions but include high-net-worth individuals and companies. This category is crucial for the success of an IPO, as NIIs typically have significant financial resources and can influence the subscription levels. Their investments can indicate strong interest and confidence in the offering.

Additionally, within the NII category, there are two subcategories:

• sNII (Small Non-Institutional Investor): sNIIs are individual or corporate investors who bid for shares worth under ₹10 lakhs in an IPO. They participate with smaller investment amounts compared to bNII investors.
• bNII (Big Non-Institutional Investor): bNII investors are individual or corporate investors who bid for shares worth over ₹10 lakhs in an IPO. They typically include high-net-worth individuals and companies with larger investment capacities.

RII (Retail Individual Investor): Retail Individual Investors (RIIs) are individual investors who apply for shares up to ₹2 lakhs in an IPO. This category often receives a specific portion of shares reserved for them, encouraging broader participation from the general public. RIIs play a vital role in the IPO ecosystem by providing liquidity and widespread market interest. Their involvement can enhance the diversity and stability of the investor base.

Allotment: Allotment is the process of distributing shares to investors who applied during an IPO. Based on the subscription levels and allocation criteria, shares are assigned to different categories of investors. The allotment process ensures a fair distribution of shares and is governed by regulatory guidelines. Investors can check their allotment status to see if and how many shares they have received. It is a crucial step following the subscription phase.

Basis of Allotment (BoA): The Basis of Allotment (BoA) is a document that outlines the criteria used to allocate shares among investors who applied for an IPO. It ensures a transparent and fair distribution process based on predefined rules and subscription levels. The BoA specifies how shares are allocated to different investor categories, such as QIBs, NIIs, and RIIs. It is crucial for maintaining investor trust and regulatory compliance.

Peer Comparison: Peer Comparison involves analyzing a company’s performance and valuation relative to its industry peers. This comparison helps investors understand the company’s competitive position and growth potential. Key metrics used in peer comparison include revenue, profitability, and market valuation. It provides a context for evaluating the company’s financial health and investment attractiveness, aiding in making informed decisions.

PAT (Profit After Tax): Profit After Tax (PAT) is a measure of a company’s profitability after all taxes have been deducted from its total revenue. It reflects the company’s ability to generate profit and is a crucial indicator for investors assessing the financial health of a company. PAT is often used to calculate other financial metrics, such as earnings per share (EPS), and provides insight into the company’s net income.

P/E Ratio (Price-to-Earnings Ratio): The P/E ratio is a key financial metric used to evaluate a company’s valuation. It is calculated by dividing the current market price of a stock by its earnings per share (EPS). In the context of IPOs, the P/E ratio helps investors assess whether the company’s shares are priced reasonably compared to its earnings potential. A higher P/E may indicate growth expectations, while a lower P/E could suggest undervaluation or slower growth prospects. However, P/E ratios should always be compared within the same industry for meaningful insights.

RoNW (Return on Net Worth): Return on Net Worth (RoNW) is a financial ratio that measures the profitability of a company relative to its shareholders’ equity. It is calculated by dividing the company’s net income by its net worth. RoNW indicates how effectively a company is using its equity base to generate profits. A higher RoNW suggests better management and more efficient use of equity capital, making it an important metric for investors.

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Happy investing!