Definitions and Terminologies

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Add-on Offering: Add-ons are additional shares issued by a company that has already gone public.

Abridged Prospectus: The document contains a summary of the main prospectus. It contains all the prominent information, just like the main IPO. It is mandatory for all companies filing an IPO to attach the abridged prospectus with the application form under the Companies Act 2013.

American Depository Receipt (ADR): ADRs are negotiable instruments issued by a US bank, representing a specified number of shares (usually one share) in a foreign company. Like regular stocks, ADRs are also traded on the US stock exchange. ADRs pay dividends in US Dollars. ADRs are an easy way for US investors wanting to invest or own stocks of foreign companies.

Anchor Investor: These are qualified institutional buyers who are allotted shares at a fixed price a day before the IPO opens. 60% of QIB reservation is reserved for anchor investors. Each investor is required to invest at least Rs 10 crore.

Asset: An asset is a resource that is owned and managed by the business or an economic entity with the purpose of getting monetary benefits in the future.

Authorised Share Capital: It is the widest term used to refer share capital of the company. It is the maximum amount of shares that a company is allowed to issue to shareholders as per its legal documents. It is also called registered capital or nominal capital. A company cannot issue shares of more value than its authorized share capital.

Bid Lot: Lot means the minimum number of shares an investor needs to bid for. The company pre-determined the lot and number of shares within each lot.

Bilateral Netting – Bilateral netting is a legal arrangement where several legal contracts or swaps agreements between two parties are netted together to create a single agreement which is an aggregate of all other agreements. This single agreement is legally obligated to have a single net payment rather than paying for each swap agreement. 

Book Runner: The book runner is the lead underwriter in a company’s initial public offering (IPO).

Book Value: The book value is the actual value of a business or a particular account as shown in the financial statements especially the balance sheet.

Capital Employed: It refers to the total funds invested into the business with the intent to generate profit.

Counterparty – The other or opposite party in a financial transaction.

Credit Derivative – A type of derivative instrument allows the transfer of credit risk relating to a debt instrument like a loan or debt default from a lender (protection buyer) to a third party (protection seller) against the payment of a fee. However, actual ownership is not transferred.

Derivative – A derivative is a financial contract that derives its value/price from an underlying asset like stocks, bonds, currency, commodities, indexes, and interest rates. Futures, Forwards, Swaps, Options, etc., are some derivatives.

Due Diligence: The investigation conducted by the parties involved in preparing a disclosure document to conclude that all information stated therein is true and no material misstatement is made.

Deemed Prospectus: It is a type of prospectus that is deemed to be a company’s prospectus. It is a document containing detailed information regarding an offer for the sale of stock of a company to the public.

Exchange-traded Derivative Contracts – Exchange-traded derivative contracts are standardized financial contracts that take place on a stock exchange settled through a clearing house and abide by the rules and regulations of SEBI.

Float: Number of shares of a company available for trading.

Final Prospectus: A Primary source for investors to seek full information regarding public offerings. Also called a Statutory Prospectus.

Follow-on Public Offer (FPO): When a company already listed on the stock exchange issues shares to the public is called FPO.

Gross Negative Fair Value represents the total fair value of all the contracts a bank owes to its counterparties without netting. It shows the maximum amount that all the counterparties would lose without having any claim on the bank’s assets in case the bank defaults.

Gross Positive Fair Value – It represents the total fair value of all the contracts where a bank has to collect money from its counterparties without netting. It shows the maximum amount the bank loses in case its counterparties default without collateral security. 

High-risk Mortgage Securities – These are the securities whose prices are highly volatile concerning any change in interest rate as determined by market forces.

Issued Capital: Issued share capital refers to the capital issued to shareholders for subscription. It is also called Called-up capital. It is the total capital issued by the company out of the total authorized capital. Issued share capital can equal to or less than the authorized share capital but can never be more than it.

Issue Price: The price at which the shares are first offered to the public for sale.

Liabilities: It refers to any kind of financial or legal obligation on the part of the company to pay the dues that it owes to someone at the end of an accounting period.

Listing Date: The date on which an IPO starts trading on the stock exchange.

Market Capitalisation: The total market value of a company’s outstanding shares. It is calculated by multiplying the current market price per share with the total number of shares outstanding in the market.

Market Value: This is the price at which the goods and services of a company could be sold in the market. How much amount the products of a company or a company itself fetch in the market.

Notional Amount – It is also called the nominal or face value of a derivative contract on which payments (interest rate payments) are calculated. It is called notional or nominal because the value does not change.

Outstanding Shares: Outstanding shares represent the number of company shares traded on the secondary market and are thus available to investors.

Over-the-counter (OTC) Derivative Contracts – Derivatives that are traded via the dealer’s network and not through any regulated exchanges or intermediaries are OTC derivatives contracts.

Paid-Up Capital: That part of the called-up share capital of a company that is actually paid by the shareholders.

Par Value: It is also called nominal value or face value. Par Value is the minimum value of financial security.

Pipeline: A supply of new issues that are tentatively scheduled to market. It is also called a visible supply.

Premium: The issue of shares at a price higher than the face value of shares.

Secured loan: A loan given by a financial institution wherein an asset is used as collateral security in case of default. The loan is backed by some security or an asset so that if a borrower defaults then a bank or institution can recover the amount by selling the collateral security. The collateral security could be gold or property papers.

Share Warrant: A share warrant is a document issued by the company under its seal that gives a right to the holder of the warrant to purchase or sell the company’s share at a specified price at a particular date. Share warrants are issued only on fully paid-up shares. It can be transferred by mere delivery hence it is a negotiable instrument.

Structured Notes – Also called hybrid security, structured notes are debt securities with an embedded derivative component like forward or options. The return on such notes is linked to the performance of an underlying asset or index.

Shelf Prospectus: A shelf prospectus is issued by a publicly listed company planning to raise public funds through multiple issues of non-convertible debt bonds. These bonds cannot be converted into share capital. A maximum of four securities issues can be made using a shelf prospectus. A Company issuing a shelf prospectus should file an information memorandum in Form PAS-2 as per Companies Act 2013.

Spinoff: When a new entity is created by the division of business of the parent company and distributes shares of the new entity to existing shareholders of the parent company.

Statement in lieu of Prospectus: It is a document filed with the Registrar of Company (ROC) when the company has not issued a prospectus to the public inviting them to a subscription to shares.

Subscribed Share Capital: It is part of issued share capital. It refers to that portion of issued share capital that has been actually subscribed by shareholders.

Total risk-based capital – It is the sum of tier 1 and tier 2 capital. Tier 1 capital comprises common equity, minority interest, and qualified preferred stocks. Tier 2 capital consists of preferred stocks not qualifying as per Tier 1 capital, allowances for loan losses, and other adjustments. Banking organizations must maintain a minimum risk-based capital ratio of 8% and a tier 1 risk-based capital ratio of 4%. 

Unsecured loan: As the name suggests, the unsecured loan is a loan that is not secured by any collateral security.  These loans carry high-interest rates due to high risk.