What Are The Pre-Requisites To Apply In IPOs?

Introduction

By this time you already know that IPO is an Initial Public Offer given by any private company that is going to become listed or the public. The basic reason behind this is to raise funds which eventually will be required and used in different areas.

Requirements for applying in an IPO

Now since investing carefully and mindfully is very important for a happy and safe future, evaluation of this (IPO) form of investment is also required. Therefore, this is the first and basic requirement for applying in any IPO.

It should be compared to other form of investments available in the market, like fixed deposit, mutual funds, real estate etc. Below are some advantages and disadvantages of investing in an IPO.

Advantages

1) IPOs processes are more transparent than those stocks which are already listed. The reason for this is that the share prices of listed stocks depend upon the market sentiments.

That means that if there is a big demand of a particular stock, its price will increase, but if no one wants to buy those stocks, the price will drop down.

The market price also depends on other factors that do affect any particular industry or business. For example, if government gives a rule that tobacco sale will be prohibited for next 1 month, then the whole industry gets effected and hence the price will decrease.

Whereas, in case of IPOs the price or the price range (in case of book built) is already fixed and all the investors (retail, HNI or institutions) get it at the same price.

2) IPO is launched when the company (which may be very promising and efficient) is still budding and just coming to the market. At this stage the price of its shares will be less, compared to what it can be 2-3 years down the line.

It means you are entering when the company is still at its first few steps. There are lot of example of companies like DLF, ICICI prudential which has got big success after IPO launch.

So, if one can analyze the company, its growth and the industry IPOs can be a big benefit.

3) Even if the prices of the shares do not jump significantly in the starting phase after IPO launch, in the long run IPOs are still equity investments. Good performing companies can still give benefits in the long run.

Disadvantages

1) If IPO is compared to other investment options like real estate and fixed deposits, it surely does come up with a higher risk as it is an equity investment. There is no guaranteed return, one has to depend on speculations and analysis.

2) IPOs are the way to raise fund from market. However, there can be various reasons behind it.

A company can raise funds for its business expansion, for its business diversification, or paying off its debt. Before getting into it, you have to dig and find out the purpose of fundraising.

Whereas, with the shares that are already floating in the market, this risk is not there.

3) Now IPOs have a certain set of process and guidelines from SEBI that has to be followed by the companies (issuer). There may be a lock-in period, which makes sure that the founders and the existing investors cannot dump their portions of shares and getaway.

In other words, they may sell their shares right after this lock-in period making the prices going down at once. Predicting this is quite a difficult task and hence increases its risk.

Once you have decided to invest in IPO after doing all kinds of necessary investigation and analysis, there are some requisites that you must know about.

1. PAN – A PAN is a combination of alphabets and numbers that is unique for every individual. If you are a retail investor you need to have a PAN in order to apply for an IPO. Even NRI investors need to have PAN in order to invest in the Indian Stock Market.

2. Demat Account – Demat or Dematerialization account is an account that allows holding the shares in the electronic form. Hence, the physical certificates of the shares are not required and all the shares, securities, mutual funds, debentures will be shown in this account.

All these accounts are held by the depositories. It works similar to a bank account. Once you sell shares, this account will be debited with that number of shares and once you buy, it will be credited.

There are 2 depositories in India, NSDL (National Securities Depository Limited) and CSDL (Central Securities Depository Limited).

These depositories have agents known as depository participants registered with them, that can be any broker firm or any bank.

Below are few examples of the processes to open a Demat account with different Broker firms.

( Angel Broking )

(5paisa.com)

The above things are mandatory irrespective of the way you are applying for the IPO, that is online through any broker or offline by filling the form and submitting it in the collection banks or with the brokers.

3. Account with a SCSB – This requirement comes into the picture if you are applying for the IPO by filling the ASBA form. ASBA forms are made mandatory from SEBI.

This is a special form which keeps the amount (for which you have made the bid) blocked in your account. For example, if you are applying an IPO worth rupee 50 thousand, then once you have submitted your ASBA application, 50 thousand rupees will be blocked in your account.

Once you are allotted with the shares, the amount will be automatically debited. However, this facility is not provided by all the banks. There are some banks that are listed by SEBI that can facilitate ASBA forms and are known as SCSB (Self Certified Syndicate Bank).

Therefore, if you are applying through ASBA forms, you need to have an account in such banks.

*Please note that ASBA facility is only available for retail investors.

4. UPI ID – This is required when you are buying IPOs online. One should get a new UPI ID or can use an existing one for paying or blocking the money while booking for the IPO.

For this you need to download a UPI enabled application and generate a UPI ID and a PIN. This has to be linked with your bank account (bank has to be SCSB listed).

Again, this can be used only by retail investors. Steps for this is shown blow using one of the mobile applications BHIM.

Install BHIM app in your mobile and select your mobile number that is registered with the bank.
Set a PIN and log in and select your bank.
Set your UPI PIN with the help of your debit card.
Share your UPI ID in your application.

Closure

Once you have the above mentioned requisites, as per the method you are applying in the IPO, you can easily do it and wait for the shares to be allotted.

A noteworthy point is that one doesn’t’ need a trading account at the time of IPO application, it will only be required once the allotted shares have to be sold in the market.

In the era of digitalization, SEBI is also taking steps to make the process more convenient for investors.