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A
Abridged Prospectus
The memorandum as prescribed in Form 2A under sub-section (3) of section 56 of the Companies Act, 1956. It contains all the salient features of a prospectus. It accompanies the application form of public issues.
Add-on offering
When a publicly traded company issues additional shares to the public.
Allocation
This is the amount of stock in an initial public offering (IPO) granted by the underwriter to an investor. For most IPOs, the allocation is significantly less than the indication of interest. The allocations are meted out based on commission volume, trading history and type of investor.
Aftermarket
All trading activity in an IPO or secondary subsequent to the new issue offering from the underwriters.
Aftermarket Orders
Underwriters look favorably on investors who buy IPOs in the days after the IPO first goes public. While underwriters cannot solicit aftermarket orders, some expect investors to purchase two or three times their IPO allocation in the aftermarket.
Aftermarket Performance
The price appreciation (or depreciation) in IPOs is measured from the offering price going forward. However, to obtain a better benchmark of IPO aftermarket performance, some investors track performance from the first day close.
Amendment
An additional registration document that is filed by the issuer with the SEC that has additional information regarding the proposed offering for that company.
American Depository Receipts (ADRs)
ADRs are securities offered by non-U.S. companies who want to list on an American exchange. Each ADR represents a certain number of a company's regular shares
Ask
Also referred to as the offer. It represents the price at which someone is willing to sell his or her stock on a market order.
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B
Basis of Allocation/Basis of Allotment
After the closure of the issue, the bids received are aggregated under different categories i.e., firm allotment, Qualified Institutional Buyers (QIBs), Non-Institutional Buyers (NIBs), Retail, etc. The over subscription ratios are then calculated for each of the categories as against the shares reserved for each of the categories in the offer document. Within each of these categories, the bids are then segregated into different buckets based on the number of shares applied for. The over subscription ratio is then applied to the number of shares applied for and the number of shares to be allotted for applicants in each of the buckets is determined. Then, the number of successful allottees is determined. This process is followed in case of proportionate allotment. In case of allotment for QIBs, it is subject to the discretion of the post issue lead manager.
Bid
Represents the price at which someone is willing to buy your stock on a market order.
Bid-Ask Spread
The difference between the bid price and the ask price
Board of Directors
The composition of the Board of Directors is particularly critical for an IPO. Typically, a board is composed of inside and outside directors. Inside directors could be management, significant shareholders, venture capitalists, vendors and relatives. Outside directors have no underlying financial or personal relationship with the company that could create a conflict of interest and are on the board for their experience, business judgment and contacts. Outside directors may own stock, but are not large shareholders. Investors should look for a board that has a majority of outside directors. Typically, IPOs add their first outside directors at or immediately after the offering.
Book
A list of all indications of interest for a new issue-offering put together by the lead underwriter.
Book Building
Book Building as a process undertaken by which a demand for the securities proposed to be issued by a corporate body is elicited and built up and the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information memoranda or offer document.
Buyer's Market
A condition in the financial markets when the buyers have a very strong input as to where an issue will get priced. This generally happens in a market that is trending lower in prices. Underwriters will usually pay closer attention to the buyer's want and needs, within reason, when that happens.
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C
Closing Price
A stocks last transaction price for the day
Co-Manager
Underwriters that appear on the cover of a prospectus and help the lead manager with the distribution of the offering but do not make the final decisions.
Common Stock
A unit of ownership in a public company for which the holder can vote on matters and receive dividends from the company's growth, but he or she is the last to receive assets if the company liquidates.
Cooling off period
The time period, usually about 20 days, between the filing of the registration statement with Securities Exchange Board of India (SEBI) and the offer of those securities to the public. During the cooling off period, the syndicate and selling group members distribute notifications announcing the new issue, send preliminary prospectuses to qualified investors for review, and take indications of interest from interested customers.
Cut Off Price
In Book building issue, the issuer is required to indicate either the price band or a floor price in the red herring 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”. This is decided by the issuer and LM after considering the book and investors’ appetite for the stock. Sebi (DIP) guidelines permit only retail individual investors to have an option of applying at Cut Off Price
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D
Day To Day (DTD)
When an IPO is listed as day-to-day on the offering calendar, it means that the lead underwriter does not have sufficient orders in the book. IPOs listed as DTD are likely to be postponed.
Delivery
Referring to the actual delivery of the stock certificates to the buyers as delivered from the seller. This completes the transaction.
Day Trader
Once a term used to describe professional investors who aggressively trade stocks, bonds and other financial instruments to capture short-term swings in prices, it is now applied to individuals who frequent small brokerage firms that offer terminals and quote streams. These individuals use their own capital - sometimes borrowed - to establish an account and then trade on a short-term basis. The term is also applied to individual investors who trade online for short-term gains. Regulators such as the SEBI are currently examining the operations of day-trading brokerage firms, who may be reaping huge profits in the form of commissions at the expense of their high-volume customers.
Differential Pricing
Pricing of an issue where one category is offered shares at a price different from the other category is called Differential Pricing. In DIP guidelines Differential Pricing is allowed only if the securities to applicants in the firm allotment category is at a price higher than the price at which the net offer to the public is made. The net offer to the public means the offer made to the Indian public and does not include firm allotments or reservations or promoters’ contributions.
Disclosure
Material information (e.g.. management practices, financial statements and legal involvements, etc.) made public by an issuer as required by the Securities Exchange Board of India (SEBI). The purpose is to put investors on notice of information pertinent to their making initial and continued investment decisions about the issuer.
Disclosures and Investor Protection guidelines (DIP)
Sebi governs the primary issuances in terms of Sebi (Disclosures and Investor Protection) guidelines. Sebi framed its DIP guidelines in 1992. Many amendments have been carried out in the same in line with the market dynamics and requirements. In 2000, Sebi issued “Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000” which is compilation of all circulars organized in chapter forms. Sebi thereon issues these guidelines and amendments under section 11 of the Securities and Exchange Board of India Act, 1992. Sebi (Disclosure and Investor Protection) guidelines 2000 are in short called DIP guidelines. It provides a comprehensive framework for issuances buy the companies.
Dividend
The amount of money or securities, out of net profits, distributed to the company's shareholders.
Due Diligence
A reasonable investigation conducted by the parties involved in preparing a disclosure document to form a basis for believing that the statements contained therein are true and that no material facts are omitted.
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E
Exchange
The physical location where brokers transact business for their clients. The principal ones are the BSE (Bombay Stock Exchange), NSE (National Stock Exchange).
e-IPO
A company proposing to issue capital to public through the on-line system of the stock exchange for offer of securities can do so if it complies with the requirements under Chapter 11A of DIP guidelines. The appointment of various intermediaries by the issuer includes a prerequisite that such members/registrars have the required facilities to accommodate such an online issue process.
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F
Follow on Public Offering
A Follow on Public Offering, FPO, is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document. An offer for sale in such scenario is allowed only if it is made to satisfy listing or continuous listing obligations
Fixed Price Offer
An issuer company is allowed to freely price the issue. The basis of issue price is disclosed in the offer document where the issuer discloses in detail about the qualitative and quantitative factors justifying the issue price
Financial Statements
Financial Statement, changes in accounting policies in the last three years and differences between the accounting policies and the Indian Accounting Policies (if the Company has presented its Financial Statements also as per Either US GAAP/IAS are presented
Firm Allotment
A company making an issue to public can reserve some shares on “allotment on firm basis” for some categories as specified in DIP guidelines. Allotment on firm basis indicates that allotment to the investor is on firm basis. DIP guidelines provide for maximum percent of shares, which can be reserved on firm basis.
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G
Green shoe option
Green shoe option means an option of allocating shares in excess of the shares included in the public issue and operating a post-listing price stabilizing mechanism for a period not exceeding 30 days in accordance with the provisions of Chapter VIIIA of DIP guidelines, which is granted to a company to be exercised through a Stabilizing Agent.
Go Public
The process by which a privately held company first offers shares of stock to the public. This is done via an Initial Public Offering (IPO).
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H
Holding Company
A company that owns enough shares of another company to secure voting control.
Hot Issue
An IPO that trades at a significantly higher price on the secondary market than its initial offering price. This usually occurs when demand of the issue far exceeds the supply.
Hard underwriting
Hard underwriting is when an underwriter agrees to buy his commitment at its earliest stage. The underwriter guarantees a fixed amount to the issuer from the issue. Thus, in case the shares are not subscribed by investors, the issue is devolved on underwriters and they have to bring in the amount by subscribing to the shares. The underwriter bears a risk, which is much higher in soft underwriting
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I
Insiders
Persons such as management, directors, and significant stockholders who are privy to information about the operations of a company, which are not known to the general public. Insiders are subject to various restrictions and or limitations regarding equity stock offerings.
Introduction
The Introduction covers a summary of the industry and business of the issuer company, the offering details in brief, summary of consolidated financial, operating and other data. General Information about the company, the merchant bankers and their responsibilities, the details of brokers/syndicate members to the Issue, credit rating (in case of debt issue), debenture trustees (in case of debt issue), monitoring agency, book building process in brief and details of underwriting Agreements are given here.
IPO - Initial Public Offering
A privately held company offers its shares to the public.
Issue Price
The price at which a new security will be distributed to the public prior to the new issue trading on the secondary market. Also commonly referred to as offering price.
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L
Lock-in
Lock-in indicates a freeze on the shares. Sebi (DIP) guidelines have stipulated lock-in requirements on shares of promoters mainly to ensure that the promoters or main persons who are controlling the company, shall continue to hold some minimum percentage in the company after the public issue
Lock-up Period
The time period after an IPO when insiders at the newly public company are restricted by the lead underwriter from selling their shares in the secondary market
Lead Manager
In the pre-issue process, the Lead Manager (LM) takes up the due diligence of company’s operations/ management/ business plans/ legal, etc. Other activities of the LM include drafting and design of Offer documents, Prospectus, statutory advertisements and memorandum containing salient features of the Prospectus.
Lead Underwriter
The underwriter who, among other things, is in charge of organizing the syndicate, distributing member participation shares and making stabilizing transactions. The lead underwriter's name appears on the left side of a prospectus cover.
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M
Market Capitalization
A method of calculating the value of a company which is equal to the number of shares outstanding multiplied by the price of each share of the stock.
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N
New Issue
A security publicly offered for sale for the first time.
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O
Offering Date
The first day a security is publicly offered for sale.
Offering Price
The price for which a new security issue will be sold to the public. Also known as Issue Price.
Offering Range
This is the price range at which the company expects to sell its stock in a public offering.
Open Book/Closed Book
Presently, in issues made through book building, Issuers and merchant bankers are required to ensure online display of the demand and bids during the bidding period. This is the open book system of book building. Here, the investor can be guided by the movements of the bids during the period in which the bid is kept open. Under closed book building, the book is not made public and the bidders will have to take a call on the price at which they intend to make a bid without having any information on the bids submitted by other bidders.
Outstanding Shares
The number of shares that have been issued by the company which are held by the insiders and the general investing public.
Over Allotment
Part of the underwriting agreement which allows, in the event the offering is oversubscribed, the issuer to authorize additional shares (typically 15 percent) to be distributed by the syndicate, also called the green shoe.
Oversubscribed
A situation in which investors have expressed an interest in buying more shares of a new security than will be available. Under this condition, the price of the security has a greater likelihood of opening higher in the secondary market than is the offering price.
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P
Price band
The Red Herring Prospectus may contain either the floor price for the securities or a price band within which the investors can bid. The spread between the floor and the cap of the price band shall not be more than 20%. In other words, it means that the cap should not be more than 120% of the floor price. The price band can have a revision and such a revision in the price band shall be widely disseminated by informing the stock exchanges, by issuing press release and also indicating the change on the relevant website and the terminals of the syndicate members. In case the price band is revised, the bidding period shall be extended for a further period of three days, subject to the total bidding period not exceeding thirteen days
Preferential Issue
A Preferential Issue is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital. The issuer company has to comply with the Companies Act and the requirements contained in Chapter pertaining to preferential allotment in Sebi (DIP) guidelines which inter-alia include pricing, disclosures in notice etc.
Preliminary Prospectus
This is the offering document printed by the issuer containing a description of the business, discussion of strategy, presentation of historical financial statements, explanation of recent financial results, management and their backgrounds and ownership. The preliminary prospectus has red lettering down the left-hand side of the front cover of the prospectus and is sometimes called the” red herring."
Premium
If the opening price of an IPO in the secondary market is higher than its offering price, the difference would be the premium.
Price Range
This is the price range at which the company expects to sell its stock in a public offering, also referred to as Offering Range.
Privately Held
A company whose shares have never been offered publicly for sale.
Private Placement
An investment in a company by a group of private investors. The offering is limited both by the amount of shares or units and the number of investors. The recipients receive restricted stock from the issuer.
Postponement
When an offering that had a tentative "pricing" date is pushed back in timing to a later date. Postponement may occur when market conditions threaten the viability of the offering. Extremely adverse market conditions could lead to cancellation of the offering.
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Q
Qualified Institutional Buyer
A ‘Qualified Institutional Buyer’ shall mean: a. Public financial institution as defined in section 4A of the Companies Act, 1956; b. Scheduled Commercial Banks; c. Mutual Funds; d. Foreign Institutional Investor registered with Sebi; e. Multilateral and bilateral development financial institutions; f. Venture Capital Funds registered with Sebi. g. Foreign Venture capital investors registered with Sebi. h. State Industrial Development Corporations. i. Insurance Companies registered with the Insurance Regulatory and Development Authority, IRDA. j. Provident Funds with minimum corpus of Rs 25 crore k. Pension Funds with minimum corpus of Rs 25 crore, these entities are not required to be registered with Sebi as QIBs. Any entities falling under the categories specified above are considered as QIBs for the purpose of participating in primary issuance process
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R
Red Herring
This is another name for the preliminary prospectus. This is the offering document printed by the issuer containing a description of the business, discussion of strategy, presentation of historical financial statements, explanation of recent financial results, management and their backgrounds and ownership.
Registration
A procedure by which a company who would like to go public files a registration statement with the SEBI. This statement contains a description of the company, its management and its financials.
Retail Investor
Retail Individual Investor means an investor who applies or bids for securities of or for a value of not more than Rs 1,00,000.
Rights Issue
Rights Issue, RI, is when a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders unless they do not intend to subscribe to their entitlements.
Risk Factors
Here, the issuer’s management gives its view on the internal and external risks faced by the company. Here, the company also makes a note on the forward-looking statements. This information is disclosed in the initial pages of the document and it is also clearly disclosed in the abridged prospectus. It is generally advised that the investors should go through all the risk factors of the company before making an investment decision.
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S
Safety Net
Any Safety Net scheme or buy-back arrangements of the shares proposed in any public issue shall be finalized by an issuer company with the lead merchant banker in advance and disclosed in the prospectus
Syndicate Member
The Book Runner(s) may appoint those intermediaries who are registered with the Board and who are permitted to carry on activity as an ‘Underwriter’ as Syndicate Members. The Syndicate Members are mainly appointed to collect and entire the bid forms in a book-built issue
Soft underwriting
Soft underwriting is when an underwriter agrees to buy the shares at later stages as soon as the pricing process is complete. He then, immediately places those shares with institutional players. The risk faced by the underwriter as such is reduced to a small window of time. Also, the soft underwriter has the option to invoke a force Majeure (acts of God) clause in case there are certain factors beyond the control that can affect the underwriter’s ability to place the shares with the buyers.
Settlement Date
The date on which an executed trade of securities must be paid for.
Shareholder
Any person who owns shares of a company's stock.
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U
Units
A group of securities, generally from the same company, that are bundled together and sold as a single piece. They usually consist of shares of common stock plus shares of warrants
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V
Venture Capital
A source of money for start up companies. Venture capital firms who invest in private companies that need capital to develop and market their products typically raise this. In return for this investment, the venture capitalists generally receive significant ownership of the company and seats on the board.
Volatility
A characteristic of a security, which rises or falls sharply in price within a short time period.
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W
Withdrawal
When a company decides to not continue with its proposed offering of securities.
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