Basics of stock market 5: What happens after the IPO process
Now you got an understanding of how the company comes forwards in filing the IPO process. Once the IPO is live, there are still many challenges the company has to go through to successfully come out of the IPO. Let’s take a look at what these challenges are and learn some terminologies along the way.
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Primary market and Secondary market
In simple terms, the primary market is where the securities (shares) are created and the secondary market is where these securities are traded.
Primary market
This is the place where the companies first sell their shares or securities through IPOs. Additional to IPOs, rights issue, bond issue, share buyback is also conducted through primary market. Here the company will be directly involved in the transaction when you buy shares through IPO.
Secondary market
The secondary market is the stock market where the buyers and sellers come to trade. The exchanges act as the secondary markets here. We have 2 main exchanges in India, the National stock exchange (NSE) and the Bombay stock exchange (BSE). Here, while buying shares, the company will not be involved since you are buying shares from another investor who wishes to sell.
Subscription
This refers to the number of people who have subscribed or brought the offering of the IPO when the company first came with its offer. These can be people like you and me or big institutional investors like LIC or banks. In fixed price issues, we can know this count only after the closure of the IPO while in the book building method, we can know after each day of the IPO process. Since the company releases a fixed number of shares for its IPO, we can determine how the IPO performed by comparing how many people brought the shares to the number of shares allotted.
Cut off price
This is the price they fix for the IPO when the shares are allotted using the book building method. Suppose the IPO is allotted with a price band of 120-130 and after the IPO closure the listing price is set to 125. Thus, 125 will be the cut-off price.
So, in terms of fixed price IPO, it will be the fixed price which we will be referring to and in the case of book building method IPO, we will be referring to cut off price.
For people like you and me, often referred to as retail participants, we need to go to our trading terminal (the place where we buy shares) and allot ourselves the required shares of the IPO company which we are going to buy.
There are 2 scenarios that can happen in the case of subscription:
Oversubscription
Sometimes the demand for the shares is higher than the number of shares that are being sold in the IPO. This can happen when a reputed company has come for an IPO. When Zomato came for an IPO in 2021, the IPO was oversubscribed by 38 times. They come for the IPO to raise 719 million but received bids for 27.5 billion. This is mainly because Zomato is the leading online food delivery solution in India and has been in the Indian market for 13 years making a name for itself.
Although this is good in terms of IPO, it has a negative effect on the investors. Now, the bidding will go for a draw and only a few ones will be lucky to get the shares. Suppose I subscribed to Zomato for 100 shares, since it's oversubscribed, the chances of getting the allotment for me is less. Even if I get an allotment, I will be getting a portion of the bidding I asked for. Maybe, I might not get an allotment at all and come back empty-handed. In this case, I would have to buy the shares once it gets listed in the stock market.
Greenshoe option: This is an oversubscription option where the merchant banker agrees to sell an additional 10-15% of the shares if the demand is high. This is called the greenshoe option because, in 1919, the Green Shoe manufacturing company was the first to issue this type of option. This option provides additional price stability to a security issue because the underwriter (merchant banker) can supply and smooth out price fluctuations.