The Initial Public Offer

An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. It is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuer’s securities. The sale of securities can be either through book building or through normal public issue.

Book Building Process:
Book Building is basically a process used in IPOs 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.

Cut-Off Price:
In a Book building issue, the issuer is required to indicate either the price band or a floor price in the prospectus. The actual discovered issue price can be any price in the price band or any price above the floor price. This issue price is called “Cut-Off Price”. The issuer and lead manager decides this after considering the book and the investors’ appetite for the stock.

Floor price:
Floor price in case of book building is the minimum price at which bids can be made.

Price Band:
The prospectus may contain either the floor price for the securities or a price band within which the investors can bid. The cap should not be more than 120% of the floor price. The price band can also be revised. It is up to the company to decide on the price or the price band, in consultation with Merchant Bankers.

Normal public issue:
In this issue, Price at which securities will be allotted is known in advance to investor. The demand is known only at the close of the issue. The normal public issues are not followed now a day.

Minimum No of Days:
The book should be kept open for at least three days.

Grade:
Is another important criterion to be considered for an IPO. The grade is nothing but the rank given to the Issuer by the third party companies like Standard & Poor, Moody’s... Etc.

These are the information to be known while applying for an IPO.