Who are Merchant Bankers, and how does an IPO work in India?
Merchant bankers, also known as Book Running Lead Managers (BRLM) or Lead Managers (LM), play a key role in the IPO process in India. They assist companies with due diligence, legal compliance, preparing the Draft Red Herring Prospectus (DRHP), underwriting, setting the price band, and appointing other key players like registrars and bankers. The IPO process begins with the company, along with the merchant banker, filing the DRHP with SEBI. Once approved, the company submits the Red Herring Prospectus (RHP) and final documents, detailing the IPO launch date and other essential information.
What are DRHP and RHP, and what role does SEBI play in the IPO process?
The Draft Red Herring Prospectus (DRHP) is a preliminary document submitted to SEBI when a company plans to go public. It provides details about the company’s business, financials, and risks but excludes the IPO price and number of shares. After SEBI’s approval, the company finalizes the issue size, date, and price band to create the Red Herring Prospectus (RHP). You can find these documents on SEBI’s website under Filings > Public Issues > Red Herring Documents filed with ROC. SEBI plays a crucial role in regulating IPOs by reviewing registration statements, ensuring transparency, conducting due diligence, and deciding whether to approve or reject the IPO application.
What are the different types of issues and their differences, and what is the IPO timeline?
There are two main types of issues in an IPO: Fresh Issue and Offer for Sale (OFS). In a Fresh Issue, the company raises capital by issuing new equity shares, while in an OFS, existing shareholders sell their shares to the public.
The IPO timeline includes key dates:
- Open & Close Date – The window for investors to apply.
- Allotment Date – Announcement of share allotment.
- Refund Date – Refunds for unsuccessful applicants.
- Credit to Demat Account Date – Shares are credited to investors’ demat accounts.
- Listing Date – Shares begin trading on the stock exchange.
What is a Price Band and Floor Price?
A price band is the range of the share price, with a lower and upper limit, within which the company will sell its shares to IPO applicants. The floor price is the minimum bid price, representing the lower limit of the price band set by the company.
What is Book Building, Cutoff Price, and Fixed Price IPO?
Book Building is a process where, once the price band is set, the public submits bids at different price points within that range to help determine the fair offer price. This method is used for effective price discovery.
The Cutoff Price is the final offer price at which shares are issued to investors, typically set within the price band based on the bids received.
A Fixed Price IPO is when a company sets a specific price for its shares without offering a price band.
What is Under subscription and Over subscription, and what happens when an IPO is under subscribed?
Under-subscription occurs when investors don’t purchase all the shares available in an IPO, while Oversubscription happens when demand exceeds the number of shares being offered. In case of under-subscription, merchant bankers typically step in to underwrite the shares, purchasing any unsold portion of the offering, but this applies only to newly issued shares, not those sold by existing shareholders (OFS).
What is Green Shoe Option, Lot Size, and Lock-in Period in an IPO?
The Green Shoe Option allows companies to sell more shares than initially planned in an IPO (up to 15% more) if there’s high demand, helping stabilize the stock price. Lot Size is the minimum number of shares you can bid for in an IPO, and any additional shares must be bid in multiples of this size. The Lock-in Period is a set time during which major shareholders, like promoters, cannot sell their shares after the IPO, ensuring stability in the stock post-listing.
What are the different investor categories in IPOs, and how do Anchor investors differ from other QIB participants in IPOs?
In IPOs, investors are categorized as:
- Retail Individual Investors (RIIs): Those applying for shares worth ₹2 lacs or less.
- Non-Institutional Investors (NIIs): Investors applying for more than ₹2 lacs, including corporates and HNIs.
- Qualified Institutional Buyers (QIBs): Includes Anchor Investors, mutual funds, FPIs, insurance firms, banks, etc.
Anchor Investors are a key subset within QIBs, differing from other QIBs by:
- Committing at least ₹10 crores.
- Having access to the book one day before the issue.
- Receiving up to 60% of the QIB portion.
- Having a 30-day lock-in period.
What is the Grey Market and Grey Market Premium?
The grey market is an unofficial market where shares are traded before they are officially listed on a stock exchange. The Grey Market Premium (GMP) is the difference between the expected price of an IPO share in this unofficial market and its issue price, providing an indication of how the IPO might perform on its listing day.
