02. All About IPO Raising Money in Primary Market.pdf

All about IPO, Primary Market V. Ravichandran WHY COMPANIES NEED CAPITAL? Raising capital helps the company grow, innovate, expand and take risks because IPOs can provide them with financial cushion. For example, a small start-up will have small investors or families investing...

All about IPO, Primary Market V. Ravichandran WHY COMPANIES NEED CAPITAL? Raising capital helps the company grow, innovate, expand and take risks because IPOs can provide them with financial cushion. For example, a small start-up will have small investors or families investing in them, without hoping for that much of a return. These kinds of investors are usually called Angel Investors. But for start-ups to actually compete with large-scale organizations, they always need more capital at the end of the day. This is why many a times, private businesses decide to launch an IPO. Once the company has ‘gone public’ and if the stocks are doing well, it becomes easy for businesses to grow further. One of the major examples of a successful IPO is the Alibaba Group (BABA) IPO in 2014. That IPO helped Alibaba raise $25 billion ADVANTAGES OF IPO: RAISING MONEY Among the advantages of IPO is the use IPO money for various reasons. Some of them are: Cutting down debts :Many companies, planning to go public, run up big debt loads. Therefore, many companies look to reduce their debt levels by using the IPO money. Investors cheer this move because the credit crunch sends debt and financing charges higher. Paying off existing shareholders :Although not a very positive move for investors, many companies use the IPO money to pay existing shareholders. In multiple cases, co-owners cash out using the IPO money. This could have a major impact on the share prices of the company as this reveals lack of confidence by the owners themselves. ADVANTAGES OF IPO: RAISING MONEY Improving liquidity : IPO provides companies a liquidity path. Without a path to liquidity, private company owners may not be able to convert their ownership in the company to any other means of currency or investment. The overall market sentiments also affect the fate of the IPO, and hence, the liquidity path. If the markets are weak, the company might not receive a fair price for its shares. This, in turn, affects the overall funds raised. In such situations, the company has the choice to wait out the markets, or change course. ADVANTAGES OF IPO: RAISING MONEY The IPO also allows for selling the shares promptly with minimal transactional costs. The private owners of the company can dispose of their stakes in the business both during an IPO and at a later stage. The shares are usually disposed during the IPO by minority financial investors such as venture capitalists. On the other hand, disposing the shares at a later date, once the IPO has settled, is usually preferred by majority shareholders. An IPO, is often also considered as a wealth creation event. The founders, workers who have worked hard for the company get an opportunity to monetize their investments. ADVANTAGES OF IPO: RAISING MONEY Financing future projects There are companies that fund future projects using the IPO money. Investors and shareholders are especially inclined towards such companies because these steps show potential, accountability towards shareholder’s money and social responsibility. There are many examples where companies are on the verge of a breakthrough and the IPO money serves as the final push towards that achievement. Obtaining additional finances Companies constantly need funds to grow. A company which has raised a good capital from a successful IPO is in a better position to seek further funding from both government and private lenders. This also puts them in a better position to negotiate about the terms of the agreement. Secured loans often require a guarantee, and the funds raised through an IPO can serve as the guarantee. ADVANTAGES OF IPO: RAISING MONEY A successful IPO not only fuels future projects, it also improves the *pecuniary situation of the company. Once the IPO is successful, analysts, financial advisors, traders and investors suss the company in greater detail, recommending the public to buy more and helping the company get new business and bigger projects. This helps improve the company’s balance sheet. Mergers and acquisitions A well-managed company is regularly on the radar of big firms for mergers or acquisitions. Companies also use the IPO money to fund mergers. A successful IPO brings value, credibility and prestige to a company and the added funds serve as the icing on the cake for a successful merger. An IPO can help M&As in two ways, by providing additional financing or by creating a situation known as “dual tracking”. ADVANTAGES OF IPO: RAISING MONEY Additional financing An initial public offering (IPO) can often provide an essential and a powerful stimulus to private companies who are seeking to acquire other companies as their strategy of growth. In recent years, companies going public are reaching out to the acquisition-driven growth strategy. About one-third of the companies going public make at least one acquisition in their IPO year. To add to this data, typically, a public company makes four acquisitions in its first five years. IPOs also stimulate M&As when their shares are attractively priced. These serve as currency for mergers and acquisitions. ADVANTAGES OF IPO: RAISING MONEY Dual tracking The “dual-track process,” broadly defined, means that a company planning on Some examples of companies that have used the dual track IPO process in India are Info Edge India and Just Dial an exit transaction has chosen to go down the path of conducting an initial Some examples of companies that have used the dual track IPO process in India are Info Edge India and Just Dial public offering while also pursuing a possible M&A exit Dual tracking is a phenomenon where a company’s IPO and sell-out occurs in sequence over a short period of time. For many companies, going public increases its valuation, brings credibility and accountability. Ebay’s acquisition of Paypal at a 20% premium after Paypal’s IPO is a classic example of Dual Tracking.dual track ipo india examples Some examples of companies that have used the dual track IPO process in India are Info Edge India and Just Dial ADVANTAGES OF IPO: RAISING MONEY Diversification Another use of the IPO money is to invest in other similar businesses, which make the core company even more powerful and successful. Using the IPO money for diversification is a common strategy for many companies. ADVANTAGES OF IPO: RAISING MONEY Organic growth A possibility for companies is to expand the business organically. Companies do this by hiring more engineers, opening more offices around the world, and ramping up its infrastructure. This expands their network organically and also helps restless investors to see some of the money put towards tangible resources. Purchasing intellectual property Purchasing intellectual property can also be one of the uses for the IPO money. Though not very common, some companies do take pride in owning a healthy portfolio of patents. Visibility and credibility A successful IPO can be a terrific branding event for a company. Going public creates a lot of media coverage. The company can leverage this in a number of different ways to help the business. Plus, the company is expected to disclose its financials to the public. If it is in good shape, it lends further credibility and visibility. DISADVANTAGES OF IPO The disadvantages of IPO are: Costs :The issuance of public equity is arguably one of the most expensive forms of funding. There are various specific requirements as far as financial documents are concerned and these could increase the costs further. In addition, the preparation of launching an IPO is an expensive affair. There are underwriter’s commissions, registration fees, legal, accounting and other fees to consider too. DISADVANTAGES OF IPO Privacy A public company is required to reveal sensitive information. It will have to disclose its strategies, finances, contacts and key projects to the public at large. They are also required to reveal their KPIs (key performance indicators) and key calculations about salaries, incentives, profit margins and much more. Structure and control Control of the company, as well as management positions, can be taken away from existing management if a dissident investor or group of investors obtains majority control. This poses a major threat to the existing management. Volatility Once a company goes public, it becomes a part of the stock market universe. At times, there might be volatility in completely other sectors but that might have a knock-on affect on its stock prices as well. External economic factors can also impact the company’s value. What is IPO ? Initial Public Offering (IPO) is the process in which a private company or corporation can become public by selling a portion of its stake to the investors. Who should Invest in IPO? There are no restrictions on who can apply for an IPO, The only prerequisite related to applying for IPOs is that you should hold a brokerage (Demat) account. What is the IPO application process? You can apply in IPO online either through ASBA (if you have a bank account with Kotak Securities/Bank) or you can apply through UPI facility. What is IPO subscription period? The IPO issue needs to be open for at least three working days, but not more than ten working days. Who decides the date of the issue? Once ‘Draft Prospectus' of an IPO is cleared by SEBI and approved by Stock Exchanges then it's up to company going public to finalize the date and duration of an IPO. Company consult with the Lead Managers, Registrar of the issue and Stock Exchanges before decides the date. What are the different types of investor categories?- Investors are broadly classified under following categories: Retail individual Investor (RIIs) Non-Institutional Investors (NIIs) Qualified Institutional Buyers (QIBs) "Retail individual investor" means an investor who applies or bids for securities for a value of not more than Rs. 2,00,000. How to apply in IPO through UPI?- The process of applying online for shares in an IPO is very simple: Step 1: Select the IPO that you want to invest in & click on apply. Step 2: Verify mobile number , fill the application form and provide your UPI ID Step 3: Submit the application Step 4: Approve the block funds request on the UPI app. What is the life cycle of an IPO? Below is the detail process flow of a 100% Book Building Initial Public Offer IPO. This process flow is just for easy understanding for retail IPO investors. The steps provided below are most general steps involve in the life cycle of an IPO. Real processing steps are more complicated and may be different. Please visit SEBI website, stock exchange website or consult an expert for most current information about IPO life cycle in Indian Stock market. Life Cycle of IPO 1.Issuer Company - IPO Process Initialization 1.Appoint lead manager as book runner. 2.Appoint registrar of the issue. 3.Appoint syndicate members. 2.Lead Manager's - Pre Issue Role - Part 1 1.Prepare draft offer prospectus document for IPO. 2.File draft offer prospectus with SEBI. 3.Road shows for the IPO. Life Cycle of IPO 3. SEBI – Prospectus Review 1.SEBI review draft offer prospectus. 2.Revert it back to Lead Manager if need clarification or changes (Step 2). 3.SEBI approve the draft offer prospectus, the draft offer prospectus is now become Offer Prospectus. Life Cycle of IPO 4. Lead Manager - Pre Issue Role - Part 2 1. Submit the Offer Prospectus to Stock Exchanges, registrar of the issue and get it approved. 2. Decide the issue date & issue price band with the help of Issuer Company. 3. Modify Offer Prospectus with date and price band. Document is now called Red Herring Prospectus. 4. Red Herring Prospectus & IPO Application Forms are printed and posted to syndicate members; through which they are distributed to investors. Life Cycle of IPO 5. Investor – Bidding for the public issue 1. Public Issue Open for investors bidding. 2. Investors fill the application forms and place orders to the syndicate members (syndicate member list is published on the application form). 3. Syndicate members provide the bidding information to BSE/NSE electronically and bidding status gets updated on BSE/NSE websites. 4. Syndicate members send all the physically filled forms and cheques to the registrar of the issue. 5. Investor can revise the bidding by filling a form and submitting it to Syndicate member. 6. Syndicate members keep updating stock exchange with the latest data. 7. Public Issue Closes for investors bidding. Life Cycle of IPO 6. Lead Manager – Price Fixing 1.Based on the bids received, lead managers evaluate the final issue price. 2.Lead managers update the 'Red Herring Prospectus' with the final issue price and send it to SEBI and Stock Exchanges. Life Cycle of IPO 7. Registrar - Processing IPO Applications 1. Registrar receives all application forms & cheques from Syndicate members. 2. They feed applicant data & additional bidding information on computer systems. 3. Send the cheques for clearance. 4. Find all bogus application. 5. Finalize the pattern for share allotment based on all valid bid received. 6. Prepare 'Basis of Allotment'. 7. Transfer shares in the demat account of investors. 8. Refund the remaining money though ECS or Cheques. Life Cycle of IPO 8. Lead manager – Stock Listing 8. Once all allocated shares are transferred in investors dp accounts, Lead Manager with the help of Stock Exchange decides Issue Listing Date. 9. Finally share of the issuer company gets listed in Stock Market. What is the life cycle of an IPO prospectus? Documents Stage 1: Draft Offer document "Draft Offer document" is prepared by Issuer Company and the Book Building Lead Manager of the public issue. This document is submitted to SEBI for review. After reviewing this document either SEBI ask lead managers to make changes to it or approve it to go ahead with IPO processing. Draft document are available on SEBI's website in the section of ‘Reports -> Public Issues: Draft Offer Documents filed with SEBI" at: http://www.sebi.gov.in/SectIndex.jsp?sub_sec_id=70 "Draft Offer document" is usually a PDF file having information of an investor who needs to know about the public issue. It mainly contain information about the company, its business, management, risk involve in applying to this issue, company financials and the reason why company is raising money through IPO. What is the life cycle of an IPO prospectus? Stage 1: Draft Offer document The draft document can be found in the Reports section of SEBI's website. SEBI takes 30 days to process the details sent by the corporation and then gives it verdict whether anything information is to be changed or it is approved. Hence, it is then listed with securities in the trading market for a minimum of 21 days. It is also necessary to make a public announcement either on the day of submitting the ‘draft offer document’ or the day after in the English and Hindi national newspaper and one regional newspaper based upon where are they registering the document. What is the life cycle of an IPO prospectus? Stage 2: Offer Document Once the ‘Draft Offer document' cleared by SEBI, it becomes "Offer Document". Offer Document is the modified version of ‘Draft Offer document' with SEBI suggestions. "Offer Document" is submitted to the registrar of the issue and stock exchanges where Issuer Company is willing to list. What is the life cycle of an IPO prospectus? Stage 3: Red Herring Prospectus Once "Offer Document" gets clearance from Stock Exchanges, Issuer Company add Issue size and price of the issue to the document and make it available to the public. The issue prospectus is now called "Red Herring Prospectus". Red Herring Prospectus also can be found on SEBI website at: http://www.sebi.gov.in/SectIndex.jsp?sub_sec_id=72 the RHP does not include the quantity and price of the issue. it has a statement quoted in red claiming that the company does not intend to sell the shares before the final approval from SEBI IPO Process For a business that has decided to go public, the road to launching an IPO is a long and lonely one. Typically, an IPO process takes six to nine months. The following outline should give you an idea of all the steps involved: Step#1: Appointment of investment bankers/underwriters These financial experts carry out the IPO process on behalf of the company. They act as intermediaries between the company and the investors. Step#2: Registration for IPO The investment bank and the company prepare a registration statement and a draft prospectus. What is the role of Lead Managers in an IPO? Lead managers are independent financial institution appointed by the company going public. Companies appoint more then one lead manager to manage big IPO’s. They are known as Book Running Lead Manager and Co Book Running Lead Managers. Their main responsibilities are to initiate the IPO processing, help company in road shows, creating draft offer document and get it approve by SEBI and stock exchanges and helping company to list shares at stock market.  Known as the red herring prospectus (RHP), it is the most important document that a retail investor has access to and can use it to evaluate the offer. The document details all the information about the business, with the exception of price or quantum of shares being offered. All businesses have to submit the red herring prospectus. According to Section 32 of the Companies Act: The company offering an IPO needs to submit the Red Herring Prospectus with the Registrar of Companies at least 3 days before the offer is opened to public for bidding.  All the obligations that the company’s prospectus will have, should also be contained in the RHP. Any variations between the two will have to be highlighted and be duly approved by SEBI and ROC. Once the IPO bidding is closed, is closed, the company has to submit the final prospectus to both ROC and SEBI. This should contain both the quantum of shares being allotted and the final issue price on which the sale is closed. About RHP The RHP is the document that the issuer and the underwriters use to market the IPO with. It is the most important tool that a retail investor has access to and can use to evaluate the offer. The document contains all the financial and other information about the company. All the mandatory disclosures that SEBI and the Companies Act are collated in this document as well. The sections include: Definitions: All the important issue and industry specific keywords are defined in this section. If you are analyzing an offer from an industry you are already familiar with, this section may not warrant a close reading. About RHP Risk Factors: Every business faces risks and uncertainties.This section is meant to disclose every possibility that could have a material impact on company’s performance post listing, and the share price. Use of Proceeds: This is probably the most important section of the prospectus. This gives the investors information about where the money raised through the IPO will be used. This is a good indicator of the direction the business will develop in, and proxy for how well the finances are being handled by the company. Financial Information: This section contains auditor’s reports and the financial statements of the company for the previous 5 years. Legal and Other Information: All litigations filed against the company or a promoter or a director which are not yet settled are listed in this section. IPO Process Contd. Step#3: Cooling-off period This is the time when SEBI verifies the facts disclosed by the company. It looks for errors, omissions, and discrepancies. only after SEBI approves the application can the company set a date for the IPO. Step#4: Application to stock exchange The company files an application with the stock exchange where it plans to float the initial issue. IPO Process Contd. Step#5: Creating a buzz Companies need to ensure that the IPO is a big-ticket event, much like how summer Hollywood blockbusters or the Khan tentpole movies are. One way to spread the excitement in the investor circles is through the IPO road show. Upon getting approval for an IPO, the investment bankers and underwriters hired by the business get into action. They travel to important finance destinations around the world to showcase the IPO offer. Since they literally ‘take to the road’, the name ‘road show’ has stuck. The timing Road shows are organised much before the IPO date. This gives investors time to decide how much to invest. Typically, the timeline is like this: When a company decides to go public, it employs one or more teams of investment bankers or underwriters. These teams help the company to carry out the IPO process. Upon getting approval from the market regulator, the date for floating the IPO is set. Following this, a financial prospectus is released. Soon after, the investment bankers, underwriters, and company management set out on the road shows. The process Road shows are used to convince investors about the potential of the company. They highlight the future growth trajectory of the business as well as the expected market share. The teams responsible for the road shows also meet with business analysts and fund managers. Such professionals may offer insights that enhance the company’s IPO process. Company executives provide every detail about the IPO through multimedia presentations, Q&A sessions, and other user-friendly means. Increasingly, companies are posting online versions of road shows which any individual can access. To help out investors, companies may also arrange small group meetings a few days or weeks before floating the IPO. Step#6 There are two types of IPO process. They are: Fixed price issue Book building issue Step#7: This is the last step before an IPO is launched.. Businesses also ensure that company insiders (internal investors) don’t trade in the IPO. That’s because: - It helps stabilize the market without additional selling pressure from insiders. It prevents corrupt executives from pawning off overpriced shares at the expense of general buyers. It protects retail investors from a manipulated offer price of the shares. It stops the market from being flooded with too many shares that might disturb the natural demand–supply balance. Step#8,Step#9 Step#8 Finally, the issues are sold on the primary market and the money is collected from the investors. The bidding period is usually about five working days. Step#9 The IPO shares are allotted to bidders within 10 days of the last date of bidding. In case the IPO is oversubscribed, the shares are allotted proportionately to the applicants. For example, suppose the oversubscription is four times the allotted number of shares. Then an application for 10 lakh shares will be allotted only 2.5 lakh shares. Who decides the Price Band? Company with help of lead managers (merchant bankers or syndicate members) decides the price or price band of an IPO. SEBI, the regulatory authority in India or Stock Exchanges do not play any role in fixing the price of a public issue. SEBI just validate the content of the IPO prospectus. Companies and lead managers does lots of market research and road shows before they decide the appropriate price for the IPO. Companies carry a high risk of IPO failure if they ask for higher premium. Many a time investors do not like the company or the issue price and doesn't apply for it, resulting unsubscribe or undersubscribed issue. In this case companies' either revises the issue price or suspends the IPO. FIXED PRICE IPO Under this method the IPO share price is fixed before it is made available to the public. This price is usually set by evaluating the total assets, liabilities, and every other financial aspect. The IPO price does not fluctuate depending on its demand. The total demand for that IPO is known only after the issue is closed. BOOK BUILDING IPO In a book building IPO, the price is determined during the process of IPO. There is no fixed price, but a price band. The price band is decided based on the company’s financials, the success of the road shows and prevailing market conditions (we have spoken about these in earlier chapters). The lowest price in the band is the ‘floor price’ and the highest price is the ‘cap price’. The investors are free to bid for any number of shares, along with the price at which they are willing to pay. The quoted price must be within the price band though. BOOK BUILDING IPO In the end, the share price is decided based on the bids. The demand of that IPO is published every day as the book is built. Most companies adopt the book building practice. Private businesses launch IPOs with an aim to raise capital — this is what the common practice is. A company can’t issue another IPO once it is listed in the stock exchanges. However, listed companies can issue shares to the public again. They can do so through a follow-on public offer (FPO) or an offer for sale (OFS). What is the difference between Floor Price and Cut-Off Price for a Book Building Issue? Company coming up with Book Building Public Issue decided a price band for the issue. The price band usually contains an upper level and a lower level. Floor Price is the minimum price (lower level) at which bids can be made for an IPO. Investors can bid for the Book Build IPO at any price in the price band decided by the company. In Book Build process retail investors have an addition option to choose "Cut-Off" price for bidding. 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. Retail investor has to pay the highest price while placing the bid at Cut-Off price. If company decides the final price lower then the highest price asked for IPO, the remaining amount is return to the retail investor. Retail Individual Investor (RII) Resident Indian Individuals, NRIs and HUFs who apply for less than Rs 2 lakhs in an IPO under RII category. Not less than 35% of the Offer is reserved for RII category. NRI or HUF who appling in an IPO with less than Rs 2,00,000 can apply in RII category. RII category allows bid at cut-off price. Allotment Basis If IPO doesn't get over-subscribed in RII Category, full allotment to all applicants. If IPO is oversubscribed in this category - The allotment to each investor shall not be less than the minimum Bid Lot, subject to availability of Equity Shares in the Retail Portion. For example, if the IPO subscribed 2 times in retail 1 out of 2 applicants will get 1 lot irrespective of how many shares they applied for. Say investor A applied for Rs 2 lakhs (15 lots), investor B applied for 1 lot and investor C applied for Rs 1 lakh (7 lots) in an IPO at cut-off price. If IPO subscribed 3 times in RII Category, the allotment will be done through lottery and only 1 of 3 applicants will get 1 lot allocated. It doesn't matter how many shares they have applied.  Retail and non-institutional bidders a re permitted to withdraw their bids until the day of allotment. Note: Always apply at cut-off price in this category. If IPO oversubscribe, apply only 1 lot per IPO application. To maximize the allotment, apply though multiple accounts on your family members name. INITIAL PUBLIC OFFERINGS (IPO) QII Qualified institutional investors (QIIs): Commercial banks, public financial institutions, mutual fund houses and Foreign Portfolio Investors that are registered with SEBI fall in this category. Underwriters try to sell large chunks of IPO shares to them at a lucrative price before the start of the IPO. Selling shares to QIIs go a long way in helping underwriters meet the targeted capital. SEBI mandates that institutional investors sign a lock–up contract for at least 90 days to ensure minimal volatility during the IPO process. INITIAL PUBLIC OFFERINGS (IPO) QIIs are especially important for a company launching an IPO. That’s because underwriters offer IPO shares to them before the price discovery in the share market takes place. If QIIs buy more shares, there would be lesser number of shares available to the general public. This would result in higher share prices. This scenario is ideal for a company because they want to raise as much as capital as possible. However, SEBI has laid down rules to ensure companies do not distort the IPO valuations. That’s the reason the regulatory body does not allow companies to allocate more than 50% shares to QIIs. Anchor investors: Anchor investors: Any QII, who makes an application of over Rs 10 crore, is an anchor investor. Such investors typically bring in other investors as well. Up to 60% of the shares meant for qualified institutional investors can be sold to anchor investors. High net-worth individuals (HNIs)/Non- institutional investors (NII): High net-worth individuals (HNIs)/Non-institutional investors (NII): Individuals looking to invest more than Rs 2 lakh are categorized as HNIs. Similarly, institutions that want to subscribe for more than Rs 2 lakh are called non-institutional investors. The difference between a QII and an NII is that the latter does not have to register with SEBI. Non-institutional bidders (NII) Resident Indian individuals, NRIs, HUFs, Companies, Corporate Bodies, Scientific Institutions, Societies, and Trusts who apply for more than Rs 2 lakhs of IPO shares fall under the NII category. Not less than 15% of the Offer is reserved for the NII category. A high Net-worth Individual (HNI) who applies for over Rs 2 Lakhs in an IPO falls under this category. Non-institutional bidders are permitted to withdraw their bids until the day of allotment. NIIs are not eligible to bid at the cut-off price. NII need not register with SEBI. NII Sub-categories NII category has two subcategories: Non-institutional bidders (NII) categories 1.sNII (bids below Rs 10L)The Small NII category is for NII investors who bid for shares between Rs 2 lakhs to Rs 10 lakhs. The 1/3 of NII category shares are reserved for the Small NII sub-category. This subcategory is also known as Small HNI (sHNI). 2.bNII (bids above Rs 10L)The Big NII category is for NII investors who bid for shares worth more than Rs 10 Lakhs. The 2/3 of NII category shares are reserved for the Big NII subcategory. This subcategory is also known as Big HNI (bHNI). Non-institutional bidders (NII) sNII Allotment Basis If IPO doesn't get over-subscribed in the sNII sub-category, full allotment to all applicants in the sNII category. If IPO is oversubscribed in the sNII sub-category, the allotment to each investor shall not be less than the minimum application size (~Rs 2 Lakhs), subject to the availability of Equity Shares in the sNII Portion. This is similar to allotment in the RII category but instead of 1 lot, the sNII investor gets shares worth of minimum application size which is just above Rs 2 lakhs. Example: if the IPO subscribed 2 times (application-wise) in the sNII sub- category, 1 out of 2 applicants will get the minimum sHNI application (worth around Rs 2 Lakhs) irrespective of how many shares they applied for. Non-institutional bidders (NII) bNII Allotment Basis If IPO doesn't get over-subscribed in the bNII sub-category, full allotment to all applicants in the bNII category. If IPO is oversubscribed in the bNII sub-category, the allotment to each investor shall not be less than the minimum sNII application size (~Rs 2 Lakhs), subject to the availability of Equity Shares in the bNII Portion. This is similar to allotment in the RII category but instead of 1 lot, the bNII investor gets shares worth of minimum application size which is just around Rs 2 lakhs. High net-worth individuals (HNIs)/Non- institutional investors (NII): The allotment of shares to HNIs/NIIs is on a proportionate basis, i.e., if one applies for 10,000 shares and the issue is oversubscribed 10 times, they would be allotted 1,000 shares (10,000/10). This means they are always allotted shares, regardless of whether the issue is oversubscribed or not. Typically, 1-2% of shares are earmarked for the employees as a way of awarding them for the risk they took in associating with a new company. Qualified Institutional Bidders (QIB's) 1. Public financial institutions, commercial banks, mutual funds and Foreign Portfolio Investors ect can apply in QIB category. SEBI registration is required for institutions to apply under this category. 2. 50% of the Offer Size is reserved for QIB's 3. Allotment Basis - Proportionate. 4. QIBs are mostly representatives of small investors who invest through mutual funds, ULIP schemes of insurance companies and pension schemes. 5. QIB's are prohibited by SEBI guidelines to withdraw their bids after the close of the IPOs. 6. QIB's are not eligible to bid at cut-off price. How different is QIB from anchor investor? An Anchor investor is a QIB (Qualified Institutional Buyer). However, the eligibility and role of an anchor investor in an IPO is different- 1.An anchor investor needs to invest more than Rs 10 crore. 2.The bid price and bidding window for anchor investors are different. They bid early than the normal QIBs. 3.Anchor investors can get up to 60% of the QIB allocation. How different is QIB from anchor investor? 4. Anchor investors cannot sell their shares before 30 days of the allotment. 5. Anchor investors bid for shares within the price band declared by the company. On the allotment day, the company decides the share price. If the allotment price is higher than what paid by anchor investors, then they have to pay the shortfall. with more funds. But, if the price is lower, then the excess amount is not refunded to the anchor investors. 6. As the name suggests, anchor investors lead the bidding process. Their participation or lack of it gives reliable signals to other investors. If an IPO gets strong anchor investors then it encourages other investors to apply in the IPO and vice versa Anchor Investor 1. An anchor investor in a public issue refers to a qualified institutional buyer (QIB) making an application for a value of Rs 10 crores or more through the book-building process. An anchor investor can attract investors to public offers before they hit the market to boost their confidence. 2. Up to 60% of the QIB Category can be allocated to Anchor Investors; 3. Anchor Investor Offer Price is decided separately. 4. Anchor investor's has different Anchor Investor Bid/Offer Period. 5. The minimum application size for each anchor investor should be Rs 10 crores. No merchant banker, promoter or their relatives can apply for shares under the anchor investor category. In offers of size less than Rs 250 crores, there can be a maximum of 15 anchor investors, but in those over Rs 250 crores, SEBI recently removed the cap on the number of anchor investors. 6. Anchor investor's are not eligible to bid at cut-off price. FOLLOW-ON PUBLIC OFFER A follow-on offer or follow-on public offer (FPO) entails selling of additional shares by the company. An FPO is a common strategy deployed by listed companies to raise additional capital. This is sometimes also known as a secondary offering. So in simple terms, how does an FPO work? For example, there is a company called ABC, which is already a listed company. It wants to sell additional shares to raise more capital. Types of FPOs For this purpose, company ABC would hire an investment bank to underwrite the offering, register it with Securities and Exchange Board of India (SEBI) and then handle the sale of the secondary shares. Essentially, there are two types of FPOs: Dilutive Non-Dilutive Types of FPOs Dilutive FPO In case of a dilutive FPO, the company’s board of directors agree to increase the share float in order to sell more equity in the market. Usually, this kind of FPO is issued to raise capital to reduce current debt or expand the business. Non-dilutive FPO In a non-dilutive FPO, owners of existing, privately- held shares offer their shares in the stock market.  In many cases, holders of privately-help shares are company founders, board of directors and pre-IPO investors. Usually a non-dilutive FPO happens if the original IPO had a lock-up period. The lock-up period prevents company founders and board of directors from selling their shares during the IPO. A lot of companies agree to have a lock-up period to infuse confidence in the market and provide stability during the IPO.  Therefore, a non-dilutive FPO gives these shareholders a way to monetize their position. Since existing shares are being resold, the company does not benefit in any way. All the proceeds go directly to the shareholders. Follow-on offerings are very common in the investment industry. It can be used by companies to raise some extra capital for expenses and expansions. In some cases, companies may also face a negative feedback since the shares are being diluted and hence, earnings being affected. Some specific characteristics of an FPO include: Unlike an IPO, which includes a fixed or variable price range, the price of a follow-on public offering (FPO) is market-driven. Investment banks or underwriters working on an FPO tend to focus on the current market price rather than doing the entire valuation of the company. OFFER FOR SALE Offer for sale (OFS) occurs when promoter and promoter groups of a listed company can sell their shares in a transparent manner through the bidding platform of a stock exchange. Non-promoters holding at least 10% of the share capital of a listed company are also allowed to exercise this option. In simpler terms, when promoters want to dilute their holdings in a company, they make their shares to the wider public. OFS, introduced in India in 2012, makes it easier for promoters of listed companies to cut their holdings. OFFER FOR SALE OFS is different to follow-on public offering (FPO) on several counts. In an OFS, the company sets a fixed price whereas in FPOs, the companies have a price band. OFS doesn’t require a lot of paperwork and evaluation. In contrast, issuing an FPO is similar to launching an IPO. A company issuing an FPO has to hire underwriters, notify SEBI and get managers who can manage the entire process. OFFER FOR SALE The third difference is the time period required for the two processes. OFS takes one trading day, while FPOs can last up to five trading days. Therefore, OFS saves a lot of time, complications and makes the entire procedure very swift. Another reason why companies launch an OFS is because, in some cases, the seller may offer a discount to retail investors. OFFER FOR SALE Some of the other advantages are: Since the system is platform-based, there is no need for a listed company to fill any applications. In case of no allotment, money is refunded on the same day. An investor can put multiple bids above the floor price set by the company,. This is unlike in IPOs, where the bid price cannot be more than one. The downsides are: SEBI has mandated reservation for certain categories of investors. Buying in OFS involves payment of brokerage, securities transaction tax and other charges that investors may have to pay when buying shares on the open market. THE LAST WORD There are different ways a company can choose to determine IPO valuation. Either they fix the price beforehand or let the forces of demand and supply dictate the price. It is also important to remember that while only private businesses can issue an IPO, listed companies are not strictly barred from issuing new shares to the general public. They can issue new shares either through follow-on public offer (FPO) or Offer for Sale. How is an IPO valued? Evaluation process of IPOs Factors that decide IPO valuations How to decide if the IPO is worth investing in ? IPOs generally send a thrill in the market. It garners public attention, throws the media into a frenzy and gets investors lapping up every information. But the behind-the-scenes are a lot different. Beneath the glitz are numerous brainstorming sessions of dedicated, hard- nosed teams of number-crunchers who are out to divine one truth — the right IPO valuation. How is an IPO valued? The perfect alchemy is very hard to achieve. The whole pricing method revolves around the basic economic forces of demand and supply, but getting the right share price is a difficult task. Sometimes, you need to unlock a combination of multiple methodologies to get it right. But broadly speaking, there are two pricing methods that are generally used by investment banks — the people tasked with hitting the sweet spot. They are: Absolute valuation Relative valuation ABSOLUTE VALUATION Here, the company’s value is determined by analyzing a company’s fundamentals. This technique uses discounted cash flow (DCF) analysis to determine a company’s financial health. Under the DCF model, the future cash flows are projected by using a series of assumptions about the future business performance. It is then discounted. After the discount, the present value that is finally calculated is regarded as the true worth or intrinsic value of the firm. Under the broad umbrella of the discounted cash flow (DCF) model, there are multiple analysis carried out. Some examples of these analysis are dividend discount analysis, discounted asset analysis and discounted free cash flow analysis. ABSOLUTE VALUATION There is another methodology known as the economic value. Here, the value is arrived by taking into account a company’s residual income, assets, debts, potential and other economic factors. However, there are challenges associated with the DCF analysis. Forecasting cash flows with certainty and projecting how long the CFs will remain on a growth trajectory is difficult. In addition, evaluating an appropriate discount rate to calculate the present value can be complicated. Due to the above challenges, a combination of analysis is used to minimize the error factor and to get as close to the accurate valuation, as possible. RELATIVE VALUATION Under this method, a company’s share value is determined by taking into account the value of similar companies. This is in contrast with absolute value, which looks only at a company's intrinsic value and does not compare it with other companies. Under such analysis, relative value methodologies come into play. Calculations that are used to measure the relative value of companies include the enterprise value (EV) ratio, price-to-earnings (PE) ratio, or price/EBIT. In order to compare values, the first step is to identify and segregate comparable corporations. This crucial step could be carried out by looking at market capitalization, revenue, or sales. RELATIVE VALUATION After this, price multiples are derived. This could include ratios such as price-to-earnings (PE) ratio and price-to-sales ratio. In the PE multiple, the company’s market capitalization is compared to its annual income. In the price/EBIT, the value of business operations, which is the enterprise value, is measured. In this case, only the operational value is considered. Usually companies which have extensive debts, have negative earnings but a positive EBIT. While relative valuation incorporates many multiples, it is important to use absolute valuations too. Using these methods, analysts arrive at a present value estimate. QUANTITATIVE AND QUALITATIVE COMPONENTS These are two further factors that decide IPO valuations. Let’s look at them in detail: Quantitative components A successful IPO depends on the demand of the company, its products and services and the hype generated. A strong demand for the company will lead to a higher stock price. A company might have different valuations, merely because of the timing of the IPO as compared to market demand. For instance, the demand and hence, value of mangoes are higher in the summer as compared to other seasons. Another aspect is industry comparables. If the IPO candidate is in a field that already has comparable publicly-traded companies, the IPO valuation may be linked to valuation of its direct competitors. QUANTITATIVE AND QUALITATIVE COMPONENTS Qualitative components The IPO valuation is not based on numbers and financials alone. There are other factors at play too. If a company is on the verge of a breakthrough, that can have a major role in deciding the company’s valuation. In the past, companies that promoted new and exciting technologies were given multi-billion-dollar valuations, despite have little or no revenues. Another aspect which can boost valuations is having well-known industry experts and consultants under your belt. Hiring them gives confidence and credibility to the company’s story. The investment bank has done its job. But how do you know it’s a fair valuation? The decision is not that easy. few points you need to consider before investing in an IPO: Self-assessment Here are a few questions you need to ask yourself: Would you be comfortable to own the stock even if the stock fell by 50% tomorrow? How much percentage of your portfolio are you planning to invest and what is your risk tolerance? Are you planning to invest in order to “flip” (short-term profit) it or are you investing for the long run? Based on this answer, you’d understand what nature of IPOs are more suited to you. Strong fundamentals No matter what your strategy is, considering certain factors is imperative before making a decision. DRHP – Your Bible Every company is required to file a draft red herring prospectus (DRHP) with the Securities and Exchange Board of India (SEBI). Browsing through this document would give you insights into the financials and other information about the company. Usually, if the higher percentage of shares are held by institutional investors and banks, it is a positive sign. Strong Promoters Recognised names bring a certain credibility to the table and consequently, add a premium to the price. Strong fundamentals Grading The grading of an IPO is also an important indicator. Generally, higher grading is a positive indicator. Having said that, it is not an absolute indicator. Certain companies with excellent grades have withdrawn their IPOs in the past whereas certain medium-graded companies have performed excellently. Objective Where will the funds be used? What is the objective of the IPO? The answers to such questions could help judge the time frame of returns. The objective will also suggest the company’s future growth prospects. Do you understand the business? As a general rule, it is advised not to invest in something you cannot understand. Risks Whenever you decide to invest in a company, there is a certain amount of risk involved. But one could term it as a “calculated risk” based on the past performance of the company, the sector trend and other factors and analysis. When you decide to invest in an IPO, it is like taking a leap of faith, because of two primary factors: Do you know enough about the company? And, has the market had enough time to react and justify the buying price? These two questions pose a greater risk in IPO investing. Risks What if the offer price is wrong and the market price is right? This would indicate that the company is coming into the market at a relatively higher price. This might reflect the over optimism of the management. What if the offer price is right and the first day price is wrong? In this case, the low first day returns indicates market inefficiency in the short-term. This could lead to a downgrade of the stock and could affect the price in the long run. Absolute risk This risk comes into effect if the company goes out of business. The honeymoon phase ends IPOs attract big attention on day one but things can turn for the worse from thereon. Data shows that from 1970 to 2012, a typical IPO gained just 0.7% in its second six months. Pitfalls Rumours and success stories While success stories and rumours present a very favourable case for a company, they should not be trusted. Always go by facts and figures rather than blindly believing on recommendations. Investing in brand promoters A strong brand does help an IPO to create hype but they are no guarantors for its future performance. Check the financials and verify if the numbers attest the image. Investing without an exit strategy (no stop loss) This is a general rule and also applies to IPOs. Do not marry the stock if you realise you are in the wrong IPO. Be prepared to cut your losses short and do not get emotionally attached just because you are invested. Investing in an IPO has its risks so make sure you understand the prospectus properly before drawing any inferences. WHAT IS GREENSHOE OPTIONS? Underwriters play a crucial role in this case. Since they work on a percentage basis, underwriters want IPOs to raise as much as capital as possible. So, if the stock price surges, underwriters buy extra stock from the company — up to 15% — and sell it to the public at a profit. Underwriters usually buy stock at a predetermined price. On the other hand, if the price is dipping, they buy back shares from the public. This option helps stabi-lize the pricing of the share without incurring any loss to the investors. LISTING FORMALITIES Once the bidding process is over, the underwriter or the investment banker checks if the issue has been oversubscribed or undersubscribed. If it is oversubscribed, the banks release the shares at the highest price band. The share is then listed. VERIFYING ASBA SEBI has made it mandatory for all investors to pay for the shares via ASBA (Application Sup-ported by Blocked Amount). The investors have to write their bank account numbers and authorize the banks to make payment in case of allotment. The investors need to simply sign the application forms. For investors who have been allotted the shares, their accounts will be debited according to the number of shares they have been allotted. This eliminates the task of issuing refunds to investors who have been left out. But the system is not entirely fool proof. The issuing company still has to ensure that investors have not been wrongly charged. -3 weeks.  Companies are given six days to get listed on the stock exchanges once the IPO is over. But the system is not entirely foolproof. The issuing company still has to ensure that investors have not been wrongly charged. -3 weeks. What is Basis of Allocation or Basis of Allotment? Basis of Allotment or Basis of Allocation is a document publishes by registrar of an IPO to stock exchanges and IPO investors. This document provides information about final price fixed for an IPO, issue subscription (bidding) information or demand of an IPO and share allocation ratio. What is Basis of Allocation or Basis of Allotment? The IPO allotment information is categorized by number of shares applied by an applicant. For each such category detail bidding information is provided in this document including number of valid application received, total number of share applied, ratio of the allotment and number of shares allocated to the applicants. What is Basis of Allocation or Basis of Allotment? Ratio of the allotment is a critical field for IPO's oversubscribed multiple times. This field tells how many applicants will receive single lot of shares among a certain number of applicants. For example, ratio 1:8 means only one out of eight applicant received one lot of shares; ratio value 'FIRM' means all the applicants are eligible to receive certain amount of share. What is right issue or RI? A public company that wants to raise capital can opt for a Public Issue or a Rights Issue. Oftentimes they opt for latter, followed by former. In a rights issue, existing shareholders have the right to buy a specified number of new shares of the firm at a specified price within a specified time. Usually this price is below market price. The idea is to reward existing shareholders with an investment opportunity, which is perceived to be attractive. Long-term investors can purchase additional shares in right issue at lower than current market price and hold the stocks. What is right issue or RI? From short-term investment prospective, one can sell the rights entitlement. Alternatively, the rights may be allowed to lapse. If a company is not in growth phase, rights issue tends to lower earnings per share and dividend yield. In such a scenario, offering rights (or public issue, for that matter) may not be a prudent course of action. What is right issue or RI? Declaration date This is the date on which the board of directors announces to shareholders, and the market as a whole, that the company will pay a dividend, the quntum of dividend per share and the date on which it will be paid. Declared dividend is an obligation for a company. Record Date is the date set by the company to determine, from the records, who are the holders of shares/bonds of the company. Holders of securities on that date, are entitled to dividend/interest. An investor must be listed as a holder of record to ensure the right of a dividend payout. What is right issue or RI? Ex Date is the date when existing shareholders are entitled to get dividends/ Rights Issue shares. If you buy a dividend paying stock one day before the ex-dividend you will still get the dividend, but if you buy on the ex-dividend date, you won't get the dividend. On its ex-dividend date, the price of a stock usually falls by an amount approximately equal to the value of the upcoming dividend. Conversely, if the price stays same on that date, the share price is said to have risen by an amount equal to declared dividend. What is right issue or RI? Date of payment (payable date) is the date on which the company mails out dividends to holders of record. The Investor: Current Shares 100@100rs=10000, right issue declare as 1:1 offer price is Rs 50, 100@50=5000 so Total Purchase price 200@150=15000Rs At the day of Ex Date the share price will be rs75. So First day Investor will not get any profit. The Company: Company has 100,000,000 Shares @ 100rs= Capitalization of the stock is 10,000,000,000 Rs. After Right issue Company Has capitalization of the stock (100,000,000 Shares @ 100 rs) + (100,000,000 Shares @ 50 rs ) = 15,000,000,000 If the company were to do nothing with the raised money, its Earnings per share (EPS) would be reduced by half. However, if the equity raised by the company is reinvested (e.g. to acquire another company), the EPS may be impacted depending upon the outcome of the reinvestment. WHERE TO FIND THE IPO PROSPECTUS? A: Draft Red Herring Prospectus, Red Herring Prospectus and Final Offer Document can all be found on SEBI’s website under Filings > Public Issue (https://www.sebi.gov.in/filings/public-issues.html). Draft RHP: https://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListing=yes&sid =3&ssid=15&smid=10 RHP: https://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListing=yes&sid =3&ssid=15&smid=11 Final Offer Document: https://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListing=y es&sid=3&ssid=15&smid=12 WHAT IS AN IPO PRICE BAND? A: In a book building issue, companies launching an IPO offer a 20% range, within which investors can bid for shares. The final price is decided only after the bidding is closed. This 20% range is called an IPO price band. Both retail and institutional buyers are called to submit their bids within this price range. No bid price can be less than the IPO floor price, which is the lower bound of the band. Neither can it be higher than the IPO cap price, the upper bound of the band. The book is normally open for three days, and the bidders can revise their bids as long as the book is open. Issuers prefer book building issue over fixed price issue as the process gives them the opportunity to discover the price and demand. WHAT IS A LOT SIZE? A: A lot size is a collection of shares. Another term which is very important to understand is the minimum order quantity. As name suggests, it is the minimum number of shares an investor needs to apply for while bidding for an IPO. If an investor wants to bid for more shares, he/she can do so in multiples of lot size. What is IPO oversubscription? An initial public offering (IPO) is deemed to be oversubscribed when the number of shares that investors have applied for exceed the shares offered by the company. For instance, if a company has offered 100 shares and there are applications for 1,000 shares, then it means that an IPO was 10 times oversubscribed. In case of an oversubscription, the shares are allotted through a lucky draw. WHAT HAPPENS IN CASE OF UNDERSUBSCRIPTION IPO prices are often lowered in such cases in order to ensure the issue is fully subscribed by investors, even if it results in the issuing company not raising the expected capital. The affected company has another option. Before the IPO process commences, they can get into an agreement with their underwriters stating that the latter would be required to buy unsold shares in case of undersubscrip-tion. WHAT HAPPENS IN CASE OF UNDERSUBSCRIPTION Just to refresh your memory, companies usually hire an investment bank as their underwriters during an IPO pro-cess. Underwriters help companies evaluate the right IPO valuation. Hope springs eternity and it is no different in the world of IPOs either. Companies always hope that the dark clouds float away eventually and that the IPO price goes up on the offer day. Such scenarios can happen too be-cause IPO share prices are determined by a host of external factors. REASONS FOR UNDERSUBSCRIPTION There are various reasons for an undersubscribed IPO such as lack of awareness of the IPO, high pricing, poor marketing of the IPO and market conditions. Many investors also stay away if they spot any problems/irregularities with the company. MINIMUM SUBSCRIPTION OF 90% According to SEBI (Securities and Exchange Board of India), every company needs a minimum subscription of 90% of the issued amount on the date of closure. In the event of this not happening, the company refunds the entire subscription amount it received. There is no loss to the investors as the money they invested will be returned to them. The issuing company will not receive any money though. Although there is no profit or loss made, the confidence enjoyed by the company in the market will suffer a blow.  HOW TO AVOID UNDERSUBSCRIBED IPOS First, check the grade assigned by SEBI to the company floating an IPO. The grading is done on a 5-point scale. The grade will be high if the company’s financial condition is in good stead and compares well to its competitors in the market. Second, it is always advisable to go through the company’s red herring prospectus in detail. The document, which is uploaded on SEBI’s website, provides a range of information about the company’s financials, future plans, among others. ALLOTMENT OF SHARES Since demand for IPO shares is lesser than the shares supplied, every bidder receives the full allotment. Say, an investor had bid for 10 lots of shares. If the IPO is undersubscribed, she’d get all the lots she had applied for. As mentioned earlier in the piece, in case the IPO is undersubscribed below 90%, the shares are forfeited and the money is refunded. The taint of undersubscription can affect any company. For instance, Google, one of the technology giants, has also faced this issue in the past. Back in 2008, Google were compelled to slash the share price from the original $108-135 a share to $85-95 per share. In the end, it fixed the price at $85 per share due to low demand. DOES UNDERSUBSCRIPTION LEAD TO LOSSES AFTER LISTING? Listing gains can be described as the difference between the allotment price at the time of the IPO and the stock price on the opening day at the stock exchange. If the opening day’s stock price is higher, the difference is known as listing gain. Usually, oversubscribed IPOs tend to make gains on the opening day at the stock exchange. The undersubscribed IPOs, meanwhile, rarely record listing gains. But that’s not to say the stock is condemned to underperform throughout. These stocks can bounce back over time due to better confidence in the market, healthy financial state and conducive market conditions. A FEW CASES OF UNDERSUBSCRIPTION For instance, the ICICI IPO was undersubscribed recently as many investors felt that the IPO valuation was far too high. ICICI fell short of more than Rs 50 crore — they had expected to raise more than Rs 4,000 crores. In the same week, HAL (Hindustan Aeronautics Ltd) was subscribed at only 50% during the third day of its IPO. But when LIC decided to invest, the percentage of the subscription rocketed to 99%. To sum up, it is always better to avoid getting sucked into the hype that surrounds few IPOs. Even the best of them can tank. Therefore, it is always advisable to do one’s own research before investing in an IPO. IPO Oversubscription What oversubscription is Listing gains: Meaning Difference between listing gains and oversubscription How shares allotted during oversubscription 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. IPO Oversubscription 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 results 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 green shoe option allows underwriters to issue 15% more shares than officially planned. HOW ARE SHARES ALLOTTED WHEN AN IPO OVERSUBSCRIBED? 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. Investor categories are distinguished as: HOW ARE SHARES ALLOTTED WHEN AN IPO OVERSUBSCRIBED? 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. Allocation process for retail investors Let’s look at how retail investors are allotted shares. First, let us understand what lots are. Companies issue shares in lots. A lot, in general terms, is a collection of shares. So, when it comes to allocation in case of oversubscription, the total number of shares available for retail investors is divided by the minimum lot size. This helps in determining the number of retail investors who will be allocated shares. Also, if the total number of applications is more than the number of lots available, no application is allotted more than one lot. This is to ensure that all investors have an equal chance of being allotted IPO shares, regardless of the number of lots they have bid for. In other words, an investor who bid for just 1 lot will be treated on par with another investor who bid for 10 lots. This way, fairness is ensured in IPO allotment. Allocation process for retail investors Let us look at the example of BSE IPO to understand this. In this case, the IPO oversubscribed 51.01 times. That means the total demand was for 55 crore shares, when only 1.07 crore shares were on offer. If one considered the retail section alone, the oversubscription was 6.48 times the allotted shares. Remember that investors can bid for more than one lot each. Looking at the lots of retail shares and assuming each investor had applied for one share only, the total demand was 3.98 times. That means a retail investor had a 1 in 3.98 chance of being allotted one lot of shares. In other words, close to 75% of retail investors were allotted no IPO shares at all. However, there is always a chance that the number of retail investors surpass the maximum number of shares issued. In that case, the eligibility for the minimum bid lot is determined by the draw of lots. This is an automated and a computerized process, leaving no room for any errors. RELATION BETWEEN OVERSUBSCRIPTION AND LISTING GAINS Popular IPOs are often oversubscribed because many traders want to make listing gains. Very often, the stock price on the opening day at the exchanges is higher than the IPO price. This gives an opportunity to a trader to sell the shares in order to make a quick profit. The difference, therefore, is described as listing gains. So, when an IPO gets oversubscribed and is priced reasonably, it has the potential to enjoy a good listing on the stock exchange. While oversubscription is one of the reasons for a good listing, it also depends on various other factors, such as the IPO pricing, market conditions at the time of listing etc. In 2015, of the 52 large- and small-sized IPOs, 26 listed at a gain of less than 10% and 11 listed with negative returns. For traders, the lure of listing gains is high, but at the same time they also need to make sure they analyze how the market is reacting to the IPO, the demand for the IPO and other external factors. On the other hand, long-term investors are more concerned about future growth, earnings and being a part of the company.