Before we learn the different terminologies related to IPO, financial markets are broadly divided into two segments: Primary Market and Secondary Market. Let us first understand what is primary market and secondary market and the basic concept of IPO.
Primary market: The primary Market helps companies, governments, and other financial institutions raise funds in the market for the first time. This is done through the sale of various debt and equity-based securities. For example, when a company decides to raise funds from the public, they sell part ownership of their company through the issuance of equity shares.
Secondary market: This is where the securities listed on the exchanges are traded amongst investors. These are the same shares initially offered by the company in the primary market and now can be freely traded by the investors. The important thing to note here is that all secondary market transactions are between investors or traders. The company is not directly involved in it. The secondary market provides the option of exiting the shares bought in the primary market or making new entries in stock. The primary function of the secondary market is to offer investors liquidity for their assets, and they can buy and sell at any time during the market hours.
What is an IPO?
When a company decides to go public, it decides to float an Initial Public Offering or IPO through the primary market route. A company raises capital for various reasons, such as business expansion, meeting their working capital requirements, paying off debts, investing in new projects, etc.
For Example, Company A Limited requires funds to invest in a new project and is looking to expand their business. It issues shares in the primary market. When the company issues shares for the first time, it is called Initial Public Offering (IPO).
A further issue of shares is known as Follow-on Public Offer (FPO). When a company is already listed in the public exchanges and needs more capital from the public, they launch FPO.
Both IPO & FPO issuances fall under the ambit of Primary Markets. Let us now discuss some common terminologies related to IPOs:
ASBA: ASBA (Applications Supported by Blocked Amount) is a kind of application that is authorized to block the application money in your bank account for subscribing to any public issue. If you are applying through ASBA, the application money shall be debited from your bank account only if the application is selected for share allotment, otherwise not if the issue is withdrawn or failed.
Authorized Share Capital: The maximum amount of the capital against which the number of shares can be issued by the company to their shareholders. The Authorized capital is detailed in the Memorandum of Association (MOA) of the Company.
However, at any time in the future, the Authorized capital can be increased as per necessary requirements by the company.
Paid up capital: The amount of capital for which the total number of shares of the company were issued and payment was duly made by all the shareholders. It is possible that at any point in time, paid-up capital will be less than or equal to authorized share capital. But the company cannot issue shares beyond the authorized share capital of the company. With the introduction of the Companies Amendment Act 2015, there is no minimum requirement of paid-up capital for the company. It means now any company can be formed with even ₹1,000 as paid-up capital.
Subscribed share capital: When members subscribe to the shares of a company, Subscribed capital increases. Subscribed share capital must also be equal to or less than the issued share capital. The un-allotted capital out of the subscribed share capital is called unsubscribed share capital.
Red Herring Prospectus (RHP): This is a document that contains all information about the company going public, such as business operations, financials, promoter's details and the reason for raising money through IPO. So, studying the RHP helps to decide whether to subscribe to the IPO or not.
Grey Market Premium (GMP): A grey market is an unlisted marketplace where participants buy and sell IPO applications among themselves in exchange for money. Therefore higher the premium, the higher is the possibility of staggering listing gains.