An IPO (Initial Public Offering) is when a private company offers its shares to the public for the first time to raise money and become a publicly listed company. Before an IPO, the company’s ownership is limited to its founders, employees, or private investors. By going public, the company allows ordinary people to buy shares and become part-owners.
For example, Zomato, a popular food delivery company in India, launched its IPO in July 2021, offering shares to the public at ₹72-76 per share. Through this, Zomato raised ₹9,375 crores, which it used to grow its business.
IPOs provide an opportunity for individuals to invest in a company early, but it’s essential to research before investing, as the success of an IPO depends on the company’s performance and market conditions.
Process of IPO
Launching an Initial Public Offering (IPO) is a complex yet exciting process for companies aiming to go public. Here’s a clear step-by-step breakdown of the process:
- Decision to Go Public: The company decides to go public to raise funds for expansion, new projects, or debt repayment, transitioning from private to public ownership.
- Hiring Experts: Investment banks or underwriters are hired to guide the IPO process, including pricing, offering size, and timing.
- Drafting the Prospectus: The company prepares a Draft Red Herring Prospectus (DRHP) detailing financials, strategies, risks, and fund usage to attract investors.
- SEBI Approval: The DRHP is submitted to SEBI for review, ensuring compliance and transparency before proceeding.
- Setting the Price Band: A price band is set, providing a range for investors to bid within, based on market conditions.
- Roadshows and Marketing: The company promotes the IPO through roadshows and campaigns to attract interest from institutional and retail investors.
- Opening for Bidding: The IPO opens for 3–5 days, allowing investors to bid for shares within the price band.
- Book Building: Investor demand is analyzed during bidding to determine the cut-off price for share allotment.
- Allotment of Shares: Shares are allocated based on demand, with oversubscription managed proportionally or via a lottery.
- Listing on Stock Exchange: Shares are listed on exchanges like NSE or BSE, enabling public trading and marking the company’s entry into the market.
Essential IPO Terms One Must Know
- Registrar to the Issue: The registrar to the issue is an independent financial institution that manages the IPO process. For example, KFin Technologies or Link Intime India Pvt. Ltd. often act as registrars for major IPOs. They manage tasks like processing applications, verifying details, and handling refunds.
- Underwriter: An underwriter is a financial institution, usually an investment bank, that helps a company set the price for its IPO, markets the shares to investors, and ensures the sale. For example, Morgan Stanley was one of the underwriters for Zomato’s IPO.
- Book Building: Book building is a process used during an IPO to determine the price at which shares will be issued. Investors place bids within a specified price range, known as the price band. Based on the demand and bids received, the final issue price is decided. For example, during the Zomato IPO, the price band was ₹72–₹76 per share. The final price was determined at ₹76 due to high demand.
- Issue Size: The issue size refers to the total value of shares offered to the public in an IPO. It is calculated by multiplying the number of shares being issued by the price per share. For instance, the LIC IPO had an issue size of ₹21,000 crores, making it one of the largest IPOs in India.
- Offer for Sale (OFS): In an offer for sale, existing shareholders sell their shares to the public. For example, in the Tata Technologies IPO, promoters and early investors sold part of their holdings through an OFS. The company itself did not raise any fresh funds.
- Fresh Issue: A fresh issue involves the company issuing new shares to raise funds. For example, in the Paytm IPO, a portion of the ₹18,300 crore issue was a fresh issue to raise funds for business expansion, while the rest was an OFS.
- Cut-Off Price: The cut-off price is the final price at which shares are allotted to investors. Retail investors often opt for the cut-off price while applying, agreeing to pay the price determined after the book-building process. For example, in the HDFC AMC IPO, the cut-off price was ₹1,100 per share.
- Listing: Listing is the process of a company’s shares being officially registered on stock exchanges like NSE (National Stock Exchange) and BSE (Bombay Stock Exchange). The day it is listed is called Listing Day, when the shares begin trading publicly.
Requirements for Investing in an IPO
- Demat and Trading Account: A combined Demat and trading account is required to participate in an IPO. The Demat account stores shares in electronic form, while the trading account facilitates buying and selling. Most brokers offer these accounts together for convenience.
- Bank Account: A bank account linked to your Demat and trading accounts is essential for IPO payments. For ASBA applications, the required funds are blocked directly in your account until the allotment process is complete.
- UPI ID: If applying through the UPI method, you need a UPI ID linked to your bank account. It is used to approve the payment mandate, ensuring funds are blocked for the IPO application until the allotment is finalized.
Methods of Applying for an IPO
The most accessible way to apply for an IPO, through which visually impaired individuals can easily apply, is:
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ASBA (Application Supported by Blocked Amount):
ASBA is a method where the required funds for an IPO application are blocked in the investor’s bank account until the shares are allotted. The application can be made through the bank’s net banking portal or by submitting a physical form. The advantage of ASBA is that the investor’s money continues to earn interest while it is blocked, and it is debited only after the shares are allotted. -
UPI (Unified Payments Interface):
UPI has become a fast and convenient method for IPO applications, especially for retail investors. In this process, the investor applies for the IPO through a broker or trading platform and provides their UPI ID. A mandate request is sent to the UPI app, which the investor approves to block the required amount. Once the shares are allotted, the amount is debited automatically. -
Broker Platforms:
“Broker platforms offer another way to apply for IPOs through online options. Investors can log in to their broker’s app or website, select the desired IPO, and fill in the application details. Payment is made by linking a UPI ID or bank account.”
IPO Reservation
The IPO Reservation Portion, refers to the percentage of shares reserved for specific categories of investors during an Initial Public Offering (IPO). This system ensures equitable participation and distribution of shares among different investor groups. There are primarily four types of IPO reserved categories:
- Qualified Institutional Buyers (QIBs): Reserved for institutions like mutual funds, banks, and insurance companies, usually 50% of the issue size. These investors are considered experienced and financially capable.
- Retail Individual Investors (RIIs): Reserved for individual investors applying for shares worth up to ₹2 lakhs. This quota typically constitutes 35% of the issue size.
- Non-Institutional Investors (NIIs): Reserved for individuals or entities applying for shares worth more than ₹2 lakhs, often 15% of the issue size.
- Employee and Shareholder Quota: Reserved for employees of the issuing company and existing shareholders, offering them discounted prices or preferential allotment.
IPO Allotment
IPO allotment is the process of distributing shares to investors who apply during an Initial Public Offering. When the number of applications exceeds the available shares (oversubscription), allotment is determined through a lottery system for retail investors, ensuring everyone has an equal chance of receiving at least one lot of shares. For high-net-worth individuals and institutional investors, shares are allotted on a proportional basis relative to their investment. If the IPO is undersubscribed or fully subscribed, all applicants typically receive the shares they apply for. If shares are not allotted, the blocked amount in the applicant’s bank account is released within a few days. Understanding this process helps investors manage expectations, especially in highly sought-after IPOs.
Ways to Check IPO Allotment Status
- Registrar’s Website: Each IPO has a registrar (like KFintech, Link Intime, etc.), and the allotment details are published on their official website. You can visit the registrar’s website, find the IPO allotment section, and enter your Application Number and PAN Number to check if you’ve been allotted shares.
- Stock Exchange Websites (BSE/NSE): The Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) also provide IPO allotment status. You can visit their websites, search for the specific IPO, and check your allotment status by entering your Application Number or PAN Number.
- Broker’s Platform or Trading App: If you applied for the IPO through an online broker or trading platform (like Zerodha, Upstox, etc.), you can check the allotment status directly on their platform. Most brokers have a section dedicated to checking IPO status, where you can find out if you were allotted shares.
- SMS and Email Notifications: Registrars and brokers often send SMS and email notifications to inform you about your IPO allotment status. These messages provide a quick update on whether you have been allotted shares, saving you the effort of checking online.
Advantages of Investing in an IPO
- Early Access to a Company’s Shares
IPOs allow investors to buy shares of a company for the first time, often at a price that is lower than what it might be in the future. This gives investors an opportunity to own a part of the company before its shares become available for trading on the stock market. It’s like being an early participant in the company’s growth journey, which can be rewarding if the company performs well. - Opportunity for High Returns
Investing in an IPO can lead to significant profits if the company does well after it becomes public. For example, if the IPO price of a share is ₹100 and the price increases to ₹150 in a short time, the investor earns a ₹50 profit per share. This potential for quick and substantial returns is one of the main reasons people invest in IPOs. - Potential for Long-Term Gains
IPOs are not just about short-term profits; they can also be a good option for long-term investors. If you believe in the company’s future growth and decide to hold onto its shares for several years, you could benefit from the company’s increasing value over time. As the company grows and becomes more profitable, the share price may also rise, offering long-term financial rewards.
Disadvantages of Investing in an IPO
- Lack of Historical Data
Companies that are newly listed on the stock market often don’t have a long financial history to analyze. This makes it harder for investors to evaluate how well the company might perform in the future. Without enough information, investing in such companies can feel like taking a risk without fully knowing the odds. - Underpricing Risk
Sometimes, companies deliberately set a low price for their shares during the IPO to attract more investors. While this can result in the share price rising quickly after the IPO, it doesn’t always last. The price might fall just as quickly, causing losses for investors who bought at higher prices after the initial rise. - Market Sentiment Risk
The success of an IPO often depends on the overall mood of the stock market at the time. If investors are optimistic and confident, the IPO might do well, even if the company isn’t exceptionally strong. On the other hand, if the market is uncertain or facing challenges, even a good company’s IPO might struggle. This unpredictability adds another layer of risk for investors. - Potential for Overvaluation
In some cases, investors get overly excited about a new company and end up paying more than the shares are worth. If the company doesn’t perform as well as expected, the share price might drop, leading to losses for those who bought at an inflated price. This makes it important to carefully evaluate the company before investing in its IPO.
What is the IPO Grey Market?
The IPO Grey Market is an unofficial market where people buy and sell shares of a company before it officially starts trading on the stock exchange. Think of it like a pre-release buzz for a movie. Just as people discuss and even trade movie tickets for a blockbuster before it hits theaters, shares in the grey market are traded before the IPO listing.
For example, let’s say a company’s IPO price is ₹100 per share. In the grey market, if people expect the company to do really well, they might trade those shares at ₹120 (this extra ₹20 is called the grey market premium). On the other hand, if the company isn’t generating excitement, the shares might trade at ₹90 (a discount).
Why Does It Matter to Investors?
The grey market gives an early hint about how much demand there is for the IPO. If the shares are trading at a premium, it might mean the IPO is likely to perform well on listing day. But it’s important to remember that the grey market is unofficial and unregulated, meaning there are risks involved.
For beginners, the grey market can be interesting to watch, but it’s better to focus on the company’s actual financials and official IPO details before investing. It’s like checking movie reviews but deciding to watch based on your own preferences!
Important Points to Remember
- Research the Company – Whenever you are applying for an IPO, make sure to research the company thoroughly before applying. Look into details like the sector the company operates in, its line of work, its financial reports, and the reason why it is launching an IPO.
- Multiple Applications – Many investors have more than one Demat account with different brokers. However, when applying for an IPO, you should apply using only one Demat account. This is because, no matter how many Demat accounts you have, your PAN remains the same. If you apply through multiple Demat accounts with the same PAN, your application will be rejected.
- Increase the chances of getting an IPO – If you want to increase your chances of getting an IPO, you should apply through multiple Demat accounts, meaning from your own Demat account as well as the Demat accounts of your family members, such as your father, mother, brother, and sister.