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Key terms regarding IPO

Some important terms regarding IPOs :

Red Herring Prospectus: The issuers of the IPO have to document all the details of the IPO and company financial and equity-related information is a prospectus called Red Herring

Prospectus. This is a standard name but can vary from market to market. The main elements of this document would contain the need for the company to go for a public listing, what would be done with the fund raised from the money raised through the listing, the current balance sheet of the company, information regarding promoters and financial stakeholders of the firm etc.

Oversubscription: When the number of shares that are applied for in the share market is higher than the number of shares available for subscription, it is called over-subscription. Each stock market has rules to deal in such situations as using a lottery system or proportional allotments etc.

Undersubscription : When the number of shares that is applied for in the share market is lower than the number of shares available for subscription, it is called under-subscription.

Overallotment (Green Shoe Option): For the Oversubscription scenario, the issuer can sell more allot shares to the subscribers. This is called the green show option. It is mandatory to specify that over-allotment would be exercised in the Red Herring Prospectus beforehand.

Book Building: The process where a financial institution (generally an investment bank) – also called an underwriter - prepares the draft of the IPO proposal, determines the price bands of the shares and also performs regulatory obligations on behalf of the issuer. It acts as an intermediary or a broker between the issuers and the subscriber.

Further Public Offer / FPO: Sometimes the majority of stakeholders of the company might want to sell more of their shares than what is already listed on a stock exchange. They can follow the same process as that of IPO but in this case, the selling of the privately owned shares to the general public will be termed as Follow on Public Offer or Further Public Offer.

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