Introduction to IPO
Initial Public Offerings (IPO), the name itself suggests that it is the offering from a company to the public. In other words, the company is going public from private for the first time and that is why it is called Initial offering.
At times already listed companies also offers its shares to the public and it’s known as FPO (Follow-on public offerings).
When a private company which has reached its growth stage and is ready to meet the other regulations of SEBI, announces about going public and being listed through IPO.
It means, that the company will sell it shares in the public and raise funds. Once the IPO comes into the market, the shares can further be traded. There are two types of IPOs.
1. Fixed Price IPOs
In this case the price is already fixed by the company and is announced.
2. Book built IPOs
For such IPOs, the company gives a price band and one has to bid in that price range. Depending upon the demand of the shares and the bidding price level, the company comes to a price and is announced after the bid is closed.
This is a big step for any company as it can lead to expanded growth, on the other hand it is risky and also requires more transparency and meeting all the rules and regulations set by SEBI.
Investment banks (chosen by the company) help a company in this process and are called underwriters. However, there can be one or more than one underwriter for a company.
Why Buy IPO?
One can choose between grabbing the shares of a company on the very first instance it was offered (IPO) or wait for it to become listed and then buy from the market.
There are some plus points of getting the shares of a company directly form an IPO.
Since the company is new it usually offers a discount and the share prices are relatively less. Once the company has raised its capital it can do wonders with it and later on the price will be super high.
When the shares are already in the market the price changes depending upon its demand and supply, in contrast when the shares are offered in IPO the price for the shares are fixed or within a given range and is hence the same for retail or big investors.
Long Term Benefit
If the company is promising and has the potential, the returns can be huge in the long run, as you had invested in the very initial offer.
While there are benefits of buying an IPO, just like every coin, it also has two faces. It depends on a lot of factors and one should analyze the scenarios before getting into it, like
- First, one needs to understand how much risk he/she can take financially. This is the most important factor as it differs for different individuals/companies.
- Now it comes to the company which is offering the IPO. It has been doing well till now, but future is always a risk. Try to get the information about the company.
- The reason behind IPO can also be other than just expansion and growth.
- The lockup period (a certain time period) during which the company founders, investors and employees are not allowed to sell the shares is also an important factor. Once it ends, they may dispose of all the shares and the price will be down.
Who can buy IPO?
IPOs can be brought by either a retail investor, an HNI (High Net worth Individual) or an Institution.
If you are any of these, obviously with a PAN, you can invest in an IPO. However, the rules may change depending upon which category you fall into.
If you are investing up to 2 lakhs you are a retail investor. The percentage of allotment is also different for different categories which are set by SEBI.
It is tried by SEBI that the retail investors are not overtaken by the HNIs or institutions.
How to Buy an IPO?
Once you have decided to get an IPO and have already analyses all the factors, the next step is to know how to buy the IPO. There are two ways to get an IPO – offline and online.
In both of these ways, you need to have a Demat account and a PAN. A Demat account is an account that holds the shares or securities only in the electronic form, which implies that they are not in their physical form.
It shows up all the shares you have in your name under that account number.
One will also need a trading account in the later stage, once the shares must be traded in the market.
1. Offline Method
For applying the IPO offline you need to fill a form. You can get this form in hard or soft copies, either from any broker, any bank, or from NSE/BSE website.
These forms are available only 2 days before the subscription of the IPO. To make the process more streamlined and easier, ASBA (Application Supported by Blocked Amount) form is introduced by SEBI.
ASBA helps to block the money in the bank account itself and the money is deducted only once the allotment is done, hence one is not required to give the cheque or DD along with the application form.
The point to be noted is that the account balance must be maintained, else the allotment might will get hampered.
There are e-ASBA forms also available online. However, there are only some banks listed by SEBI that give this facility.
The application will demand basic details like name, PAN, bank details and demat account details and the bid lot that has to be filled. IPOs are applied in lots, called bid-lots.
Each lot will have a specific number of shares (pre-decided by the company). Once done, it can be submitted, and the acknowledgment can be used later.
2. Online method
The added advantage to this method is that apart from being easier from the investor’s end, it also reduces the clerical work.
For this one needs to have a demat/trading account with the broker or bank that gives this facility to apply for the IPOs online.
From the account one can select IPO they want to invest, along with the other details like bidding price, number of lots etc and apply for the IPO.
For an example if you have an account with Edelweiss you can follow below steps –
- Log in to your account and in the investment, section select IPO or e-IPO
- Fill the required details and complete the process
- Select from the available IPOs you want to invest and enter the number of shares and your bidding price (if book built)
- Most noteworthy, read the terms and conditions and at last confirm and apply.
The SEBI has also come up with UPI as a payment options for IPOs. A newly created UPI ID or an already existing one can be used for the payment if the details are given at the time of form submission (if offline) or online application.
At the End
Whichever way is opted to buy an IPO, day by day SEBI is trying to make the process easier and approachable specially for the retail investors.
Be it the introduction of ASBA forms, UPI payments, or be it making the things available online through different brokers and banks.