IPOs and the investor

icon

You know now that the IPO process is a way in which the shares of a company are issued to the common public. By now, you’re also aware of the entire process that goes on to bring the IPO of a company to fruition. But do you know what happens after the IPO and what it actually means for you as an investor? That’s exactly what we’ll be covering in this chapter. So, let’s jump right in. 

What happens after the IPO process?

In the world of finance, the Initial Public Offering (IPO) of a company is commonly known as the primary market. When you buy shares through an IPO, you’re effectively buying the shares from the company itself - the originating point. This is exactly why it is popularly known as the primary market. 

Imagine the primary market as more like a dealership that sells new cars. When you make a purchase from a new car dealership, you’re effectively getting a brand new car that has never been driven before, right? And, you get it straight from the manufacturer. Similarly, the shares that you get to buy in the primary market are ones that have never been traded before. 

However, once an IPO allotment process concludes and the shares are listed on the stock exchange, they move from the primary market to the secondary market. Right from day one - the listing day - the shares of the company are publicly traded on the stock exchanges. 

Now imagine the stock exchange as a used car dealership. When you make a purchase from a used car dealership, you’re getting a car that has already been owned and driven by someone else before, right? On a similar note, when you buy shares from the secondary market, you’re effectively buying the shares from another person, and not from the company. 

This is exactly the reason why the stock exchanges are known as the secondary market. Once the shares move from the primary market to the secondary market, the company is no longer a part of the picture. The trade happens between you and another person, who currently owns the shares.   

Okay, so what do IPOs actually mean for you as an investor? What do you stand to gain by buying the shares from the primary market instead of just picking it up from the secondary market? These are two of the questions that we’ll look to answer in the next segment. 

What does an IPO mean to you as an investor?

When you participate in an IPO, you essentially get early access to the shares of a company. You get to be a part of and enjoy the value appreciation process of the company’s shares right from the start. By getting in on the action early, you put yourself in a perfect position to make full use of the company’s future growth potential. 

For instance, let’s take the case of IRCTC. If you had applied for and bought the shares of IRCTC at the time of its IPO allotment process in the month of October, 2019, you would have been able to purchase them for Rs. 310 per share. Within just a span of 9 months from the listing date, the value of the shares of IRCTC increased to around Rs. 1,300, which is a value appreciation of more than 400%. However, if you had bought the shares from the secondary market on the first day of listing itself, you would have had to purchase them for around Rs. 700 per share. Comparing it with the current day value of the shares, this would have translated to a value appreciation of just around 180%. So, you see how the primary market can be a lucrative investment opportunity?

IPO Jargon

Before the IPO process, If you happen to read through a prospectus or an IPO document, you’d come across plenty of jargons. Knowing what these terms they mean can be of immense help to you as an investor, since it allows you to better understand the issue. So, here’s a glimpse of some of the key IPO-related terms that you need to know. 

Offer date

The date on which the IPO issue opens up for subscription is commonly known as the offer date. 

Price band 

Typically, in an IPO issue, the company issues a price range with an upper and a lower ceiling limit. This is what is known as the price band. The IPO applicants have the freedom to choose any price as they deem fit from the issued price band. 

For instance, the price band of the IRCTC IPO was set at Rs. 315 to Rs. 320. And as an applicant, you’re at liberty to choose any price within this price band. 

Cut-off price 

The price within the price band that gets the highest number of bids from applicants is generally fixed by the company as the cut-off price. Any bids below the cut-off price are automatically not considered for the IPO allotment process

Lot size

The lot size is the minimum number of shares that you can make a bid for in an IPO. Any bids that you intend to make should always be a multiple of the lot size. For instance, if the lot size of a company’s IPO is 1,000, you cannot make a bid for a lesser number of shares than 1,000. But if you wish to bid for more, it has to be in multiples of the lot size, say, 2,000 or 3,000 or even 10,000.     

Undersubscribed issue

An IPO issue is said to be undersubscribed when the number of bids received from the public is less than the total number of shares in the issue. For instance, if the number of shares up for sale in an IPO issue is 50,000 and the number of bids received from the public is 30,000, the IPO issue is said to be undersubscribed. 

Oversubscribed issue

An IPO issue is said to be oversubscribed when the number of bids received from the public is higher than the total number of shares in the issue. For instance, if the number of shares up for sale in an IPO issue is 50,000 but the number of bids received from the public for those 50,000 shares is 1,00,000, the IPO issue is said to be oversubscribed by 2 times. 

Green shoe

Also called the over allotment option, green shoe is essentially an agreement that allows the company to issue additional shares (usually 15% of the issue size) in the event of an oversubscribed IPO issue.  Why is it called a green shoe? Isn’t that what you’re wondering?  Well, there’s an interesting back link to this term. The term is derived from the name of the first company, Green Shoe Manufacturing, which permitted underwriters to use this practice in an IPO.

Some recent IPOs in India 

Now that you’re aware of everything there is to know about IPOs, let’s take a quick look at some of the IPOs that hit the stock markets in recent times. 

Issuing company

Total number of shares issued 

Total issue size

Lot size 

Price band of the issue 

(per share)

Metropolis Healthcare Limited

1,36,85,095 

Rs. 1,204.29 crores

17 shares

Rs. 877 to Rs. 880

Polycab India Limited

2,50,44,686

Rs. 1,342 crores

27 shares 

Rs. 533 to Rs. 538

IRCTC

2,01,60,000

Rs. 645 crores

40 shares

Rs. 315 to Rs. 320

CSB bank

2,10,21,821

Rs. 409.68 crores

75 shares

Rs. 193 to Rs. 195 

Ujjivan Small Finance Bank Limited

20,83,33,333

Rs. 750 crores

400 shares

Rs. 36 to Rs. 37 

Wrapping up

So then, that’s about it for this chapter. This would have been a great learning experience for you. In the next chapter, we’ll deal with the different types of shares that a company is authorised to issue.

A quick recap

  • In the world of finance, the Initial Public Offering (IPO) of a company is commonly known as the primary market.
  • Once an IPO allotment process concludes and the shares are listed on the stock exchange, they move from the primary market to the secondary market.
  • Right from the listing day, the shares of the company are publicly traded on the stock exchanges.
  • Once the shares move from the primary market to the secondary market, the company is no longer a part of the picture. The trade happens between you and another person, who currently owns the shares.  
  • When you participate in an IPO, you essentially get early access to the shares of a company.
  • By investing in an IPO, you get to be a part of and enjoy the value appreciation process of the company’s shares right from the start.
  • The date on which the IPO issue opens up for subscription is commonly known as the offer date.
  • In an IPO issue, the company issues a price range with an upper and a lower ceiling limit, known as the price band. The IPO applicants have the freedom to choose any price as they deem fit from the issued price band.
  • The price within the price band that gets the highest number of bids from applicants is generally fixed by the company as the cut-off price.
  • The lot size is the minimum number of shares that you can make a bid for in an IPO.
  • An IPO issue is said to be undersubscribed when the number of bids received from the public is less than the total number of shares in the issue.
  • An IPO issue is said to be oversubscribed when the number of bids received from the public is higher than the total number of shares in the issue.
  • Also called the over allotment option, green shoe is essentially an agreement that allows the company to issue additional shares (usually 15% of the issue size) in the event of an oversubscribed IPO issue.
icon

Test Your Knowledge

Take the quiz for this chapter & mark it complete.

Comments (0)

Add Comment