Just like living organisms require nutrients to grow, companies need funds to grow. Companies arrange funds through various means. They use profits to fund growth or take a loan to finance expansion. Besides debt and profits, companies also issue equity shares to raise funds from the public. When a company issues its shares for the first time, it is known as an initial public offering or IPO. In 2018-19, companies in India raised Rs 19, 900 crores through public offerings as against Rs 76, 200 crores a year ago.

What is IPO?

An initial public offering is a process through which a private company raises funds by issuing fresh shares to the public. When a private company issues shares for the first time it is known as an initial public offering. The process is known as follow-on public offering if a public company issues additional shares after an initial public offering. The fresh equity issued by a company during an IPO is bought by investors, which makes them partial owners of the company. The funds raised through an IPO can either be used for expansion or by existing owners and shareholders to book partial profit on their investment. The shares issued as part of an IPO can be traded in the secondary market after listing.

How to invest in an IPO?

IPOs attract attention from a wide variety of investors. Investors ranging from small retail investors to large financial institutions buy shares through IPOs. However, not all IPOs give instant returns as some stocks list below the issue price.

  • – The first step is to determine if a company is worth investing in. Read a company’s draft prospectus, which is available on the website of the Securities and Exchange Board of India, to know about the company’s business plan and financial metrics.
  • – If you are convinced to invest after reading the draft prospectus, arrange the funds for theYou are not allowed to bid for a single share as shares are allotted in lots in an IPO. Investors are informed about the lot sizes in advance. For instance, a company announces a price band of Rs100-110 per share and a minimum lot size of 100 for its IPO. If you bid at the upper limit of the price band, also known as the cap price, you will have to invest at least Rs 11,000 to participate in the IPO. The unit for investment in an IPO is a lot consisting of a certain number of shares and not single shares.
  •  One needs to have a demat-cum-trading account to invest in an IPO. Having a trading account is not compulsory, but without it, you would not be able to sell the allotted shares in the secondary market.
  • Applying for an IPOis the next step. Both offline and online mediums are available for IPO Contrary to the older process, where investors had to submit cheques or demand drafts for IPO. The market regulator has made the Application Supported by Blocked Amount facility compulsory for IPOs. An amount is blocked in your bank account according to the number of lots requested. An amount to the extent of shares allotted is debited from the bank account after the allotment of shares.
  • – The allotment of shares takes place after the application process. Not everyone may receive the number of lots requested as sometimes the demand outstrips the number of shares available.
  • – It takes around a week for the registrar of the IPO to allot shares to successful investors. When the demand is more than the supply, then the allotment is decided through a lottery system.
  • One can check the allotment status through the website of the registrar. Registrars are independent institutions responsible for managing the IPO They process the application forms and also take care of the share allotment. Besides the website of the registrar, you can also check theIPO allotment status on the website of NSE and BSE. Depositories like NSDL and CSDL, stock exchanges and even brokers inform the investor through email or SMS about the allotment status. You will require the PAN and DPID/ client ID number or the bid application number to check the allotment status.

Conclusion

The stellar performance of some recent IPOs has increased retail investor interest in public offerings. The shares of a company list on the stock exchange within days of allotment. You can either choose to hold the shares or simply sell on the day of listing depending on your risk tolerance, investment horizon and liquidity needs.