Frequently Asked Questions (FAQ's) on Initial Public Offerings (IPO)| Espresso

Frequent Queries Raised in IPO

One of the major talking points in the year 2021 was the Initial Public Offerings or IPOs of several leading companies in India. From giants in the food retail industry to companies offering digital payments, the year has seen the launch of IPOs across various sectors - IPOs that created almost unprecedented buzz and attracted the interest of veteran investors and first-time investors alike.

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What is an Initial Public Offering?

If you are wondering what an Initial Public Offering is, the answer lies in the nomenclature. An Initial Public Offering or IPO is the first time a private limited company offers its shares to the public through an invitation for application to said shares. This process marks a major step for any organization and enables them to raise money from the public.

However, an IPO also entails diluting the ownership of a private company from a select few to many. All companies planning to go public through an IPO must comply with all the rules and regulations laid down by the Securities and Exchange Board of India (SEBI).

Initial Public Offering - Interview Questions

Here are some of the most frequently asked Technical Initial Public Offering Interview Questions.

1. What is book building in an IPO?

According to the Securities and Exchange Board of India, book building is the process of building up the demand for securities to be issued by a company. This is done by offering a price band for the potential investors instead of a fixed price for the shares. The Allotment Price for the shares is determined on the basis of the quantum of the shares to be issued as well as the quantum of shares for which applications are received during the Initial Public Offering.

2. What is the Minimum Number of Days for Which An IPO Should Remain Open?

An Initial Public Offering must remain open for a minimum period of three working days, during which investors can register their bids for the shares through applications.

3. What is meant by Floor Price and Cap Price in an Initial Public Offering?

The Floor Price is the lowest point in the spectrum of the price band announced by a company using the book building route in their IPO. This price is the minimum price at which investors can apply for the shares of the company. In stark contrast, the cap price is the highest point in the price band and the maximum price at which you can place your bid for the shares in a company's IPO.

4. What is the primary difference between the book building and normal public issue routes of Initial Public Offerings?

The primary difference between a book building offer of shares and a normal public issue is that the former has no fixed price at which the final allotment of securities shall be done. On the other hand, the latter does have a fixed price at which the securities are offered through an IPO.

Furthermore, the demand for the issue can be determined every day in case of a Book Building issue, whereas the demand for a Normal Public Issue can be ascertained only at the end of the issue.

5. Can a retail investor apply for an IPO?

Yes, retail individual investors can apply for the securities of a company offered through an Initial Public Offering. 35% of the total securities offered in an IPO is reserved for this category of applicants, which includes:

  • Individuals resident in India
  • Non-resident Indians (NRIs)
  • Hindu Undivided Families (HUFs)

A retail individual investor can apply for shares amounting to a maximum of ₹2 lakhs in an IPO.

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Frequently Asked Questions

The category of Qualified Institutional Bidder or QIBs includes institutional investors such as:

  • Mutual Funds
  • Commercial Banks
  • Public Financial Institutions
  • Foreign Portfolio Investors

50% of the securities in an Initial Public Offering are reserved for Qualified Institutional Bidders.

The Market Lot Size is the minimum number of shares that you need to apply for in an IPO. For instance, if the company that is offering their shares through an Initial Public Offering specifies a lot size of 200 shares, then you can apply for shares in multiples of 200 shares. It is important to note that no application can be made for less than one lot, that is, 200 shares.

The cut-off price or allotment price for an Initial Public Offering is determined on the basis of the number of shares offered in the IPO and the number of shares for which applications have been received.