As the name suggests, an Initial Public Offering (IPO) is the process by which companies raise funds from the market. Businesses require funds for a variety of reasons. They could be requiring funds for expansion of their capacity, they could be looking at diversification into new business lines, they could be looking at expanding their presence across India and abroad or they may even be looking to repay their high cost loans. All these funding requirements can be met through an IPO. As investors what you need to understand is how to apply for IPO and, more importantly, how to buy IPO online.
New offer versus Follow-on offer versus Offer-for-sale
The term IPO is actually a generic term that encompasses a variety of sub-items. For example, if the company is raising funds from the IPO market for the first time and getting the stock listed, then it is a new offer. The new offer leads to a listing and to expansion of the capital base of the company. Then there are Follow-on offers wherein the company is already listed but is looking at the IPO market for raising additional funds. Such companies are already listed on the exchanges and the IPO is just a means for raising additional funds for their plans. Finally, there is something called an offer-for-sale where the existing promoters and anchor investors hive off part of their holdings through an IPO. Most of the disinvestments undertaken by the government are in the form of offer for sale. In an OFS, the share capital of the company does not increase but it is only the ownership pattern that changes. An OFS is often used by companies to also list the company in the bourses. So, how to invest in IPO in India and how to subscribe IPOs online?
Who is eligible to invest in an IPO?
Technically speaking, any adult who is competent to enter into a legal contract is eligible to apply in the IPO of a company. Of course, it is essential that you have a PAN card issued by the Income Tax department and you also have a valid demat account. Remember, having a trading account is not necessary in case of IPOs, a demat account alone is sufficient. However, if you want to sell the shares on listing then trading account will be required. That is why brokers will advise you to open a trading account along with demat account when you apply for an IPO for the first time. An important point to be remembered here! When you apply for an IPO, it is not an offer but an invitation to offer. Only when the IPO issuer offers you shares, it amounts to an offer.
How to apply for an IPO
There are two important questions you need to address here: How to apply for IPO online and the IPO application process. Here is what you need to know when you apply for an IPO of a company
- IPOs come in two varieties viz. Fixed Price IPOs and Book Built IPOs. In a fixed price IPO, the company fixes the IPO price in advance as the sum of the par value and the premium. You can only apply for the IPO at that price. In a Book Built issue, the company will only provide an indicative price range for the IPO and the final price of the IPO will be discovered through the book building process. Nowadays, most of the IPOs are predominantly through the book building route only.
- IPOs have three classes viz. Retail, HNI and Institutional categories. Investments up to Rs.2 lakhs in an IPO are classified as retail investors. It is beneficial to invest in the retail quota because the allotment methodology is designed by SEBI to ensure that as many retail investors as possible get allotment. Thus, your chances of allotment are much higher in this case. In case of HNIs the allotment is proportionate while in case of institutions the allotment is discretionary.
- You can bid for IPOs through the offline method or through the online method. In the offline method, the form is filled up in physical form and submitted to the IPO banker or to your broker. In an online application you can log in the application directly through the trading interface provided by your broker. The advantage in the online IPO is that most of your data is automatically populated from your trading / demat account thus reducing the clerical effort from your side. That largely simplifies the online IPO application form fill-up process. In fact, IPO online application is the preferred mode.
- Under the book built method, the basis of allotment is finalized within 10-12 days and the demat credit also happens within a couple of days after that. Once the shares are in your demat account and the stock is listed on the exchanges, you are free to sell the shares. As stated earlier, you need a trading account to sell these shares.
- There is a very important aspect you need to understand about applying for IPOs. SEBI has now made available a facility called the ASBA (Applications Supported by Blocked Amounts). The advantage of an ASBA IPO is that you do not have to issue a cheque or pay any money for the IPO till the allotment is made. The amount to the extent of your application is blocked from your bank account and on the allotment day, the amount will be debited only to the extent of the shares allotted. That means if you applied for shares worth Rs.1.50 lakhs and you got allotment for only Rs.60,000, then only Rs.60,000 gets debited to your account and the block on the remaining amount is removed from your designated bank account.
The IPO application process has become substantially simpler in the last 10-15 years. In the process it has substantially empowered the retail investors across India
Things You May Also Like to Know
Is buying IPO a good idea?
It is a good investment option, but you must know that not every IPOs are worth investing. Here are a few things to remember while considering an IPO.
- Do a complete background check
- Read the prospectus carefully
- Pick companies that are backed by reliable underwriters
- Get clarity over vividness bias. IPOs can create an illusion of strong performance, long-term success, and such. Get the facts before investing
- Wait for the lock-in period to get over
What is the IPO issue price?
Offering price or issue price is the price at which IPOs are floated in the primary market.
When can I buy an IPO stock?
You can buy IPOs when they are launched in the primary market, or when they are traded like stocks in the secondary market.
Can you buy an IPO before it goes public?
Yes, you can. One advantage of it is that you can buy shares at a fixed price. You can ask your broker to find an advisory firm that specialises in pre-IPO sales.
How do I get a new IPO?
Finding potential IPOs to invest can be a challenge. But if you are interested, you can find hints in equity market websites, by searching in Google News with search words like IPO, or by following broking houses’ websites.
Can I apply for IPO twice?
No, you can’t apply for IPOs multiple times. If it is discovered that you have applied multiple times with the same name, PAN number, and same DEMAT account your application will get rejected.
Is UPI mandatory for IPO?
No, it isn’t mandatory, but you can now apply for IPO using UPI id. UPI is accepted as a new medium of applying for IPO by SEBI.
How can I increase my chances of an IPO?
The current formula to allot IPOs is to divide the total number of shares available to retail individual investors (RIIs) by minimum bid lot. If you have found a potential deal, you can increase your chances by adopting the following steps.
- Large bids are ineffective unless more than Rs 200,000 in volume
- Use different DEMAT account to submit multiple applications
- Choose cut-off bids over price-bids to increase your chances
- Don’t file applications at the last moment
- Avoid your application getting rejected for names mismatch, spelling mistakes and other technical errors
How can I buy IPO offline?
The online process has made it easier and fast to apply for IPOs, but if you still want to apply offline here is what you need to do.
- Get IPO application form from a broker or download it from NSE/BSE website
- Fill in the form with required details such as – bank details, DEMAT details, Pan Card No., and cut-off price
- Submit the application with your broker or a bank with ASBA (Applications Supported by Blocked Amount) facility