Though most of us are aware of what an initial public offering (IPO) is, we still do not completely understand how it works. It may not be easily perceived but the financial systems that govern our world are more intricate than we give it credit to be. While we go about our daily lives working and studying to make a difference, the economy thanks us by displaying its kindness in its own endearing way. Understanding the man-made processes that govern our society is important, starting with the IPO bidding process. For this reason, we write this article to explain to you how the indivisible economic machine continues to operate while we standstill.
Appreciating our Roots
Before understanding what exactly happens to the money we use for an online IPO bidding, it is important to understand why we, as Indians, need to be proud of this process. The Dutch East India Company was the first company to formally list equity shares for public investment. Making history, this action was noted down as the first time a company ‘went public’. The company raised 6.5 million guilders almost immediately after going public.
IPO Bidding Process
Opening a demat account is the first step an individual must take for a successful online IPO bidding. Getting in touch with a broker who acts as the middleman between you and your IPO is essential for this process. Using any online platform that you find easy to navigate through is the next step. After completing these basic steps, finding a company you wish to bid for and entering the number of shares you wish to bid for is imperative. After submitting this application, you will receive an application number and transaction details pertaining to your investment.
Six day IPO Bid Process
Many bidders turn a blind eye to the IPO bid process that takes place immediately after placing a bid. On the third day after bidding for an IPO, the allotment of shares takes place. This process is also termed as the allotment date. The fourth day is concerned with the intimation of refunds. The most important day is the fifth day which is when your demat account is credited with the pertinent shares. You are also notified about the crediting of these shares. In case the shares do not get credited to your demat account, the money you bid is returned to your demat account. The final day—the sixth day—involves the IPO getting listed on exchanges.
If the total number of bids you make are only a little higher than the total number of shares being allotted, you will still receive at least one lot of shares. The process is very different, however, if the total number of bids you make are a lot higher than the total number of shares being allotted. In this case, an unbiased system is followed where a luck draw method is approached for the proper allotment of shares. This system works in a way such that only bids priced beyond a certain amount are given a priority. These bids are considered valid, whereas other bids are refused. If refused, the money invested is immediately given back to investors.
Full Subscription of Shares
As the term suggests, when an IPO is fully subscribed it means that every share is accounted for and allotted to investors. The company selling their shares, in this case, is left with zero risks. The process of a full subscription of IPO shares is rather simple to understand. After closing the offering of shares to the public, every bid is properly checked. Registration of these bids are thoroughly looked over. Bids that include faulty or wrong information are rejected. Entering bids with wrong information is not uncommon. Errors in PAN numbers and other identification details are normal, especially if the bid is filed in a hurry. In a situation where the number of bids made by investors perfectly matches with the number of shares available in the IPO, the IPO is said to be fully subscribed. Every bid applicant is allotted a certain number of shares and the IPO is declared to be a success.
Terminology
We conclude this article by providing our readers with some basic IPO terminology that every bidder must be aware of before completing their bidding application.
Listing Date
This is the date at which the IPO shares are listed on stock exchanges and are available for trading purposes.
Underwriter
The underwriter acts as a medium through which your IPO dealings are reviewed and completed. They are investment banks who work with the issuing body to set the price of the IPO shares. By using their vast distribution network, they publicise IPOs and allot shares to various investors. Choosing a good underwriter is important as it ensures that the shares are sold faster by tapping into a good distribution network.
Cut Off Price
This refers to the lowest amount at which shares are offered for allotment in an IPO.
Floor Price
Most bidders use the terms ‘cut off price’ and ‘floor price’ interchangeably. Both these terms, however, are defined very differently. Floor price refers to the lowest price of each share in an IPO.
Lot Size
In certain cases, a bidder cannot just apply for one share; a certain number of shares must be invested. Lot size refers to the lowest number of shares that an investor can bid for. An investor has to bid for shares depending on the lot size, rather than the number of shares.
Conclusion
In this article, everything about an IPO is discussed in elaborate detail. While many investors actively bid for shares in IPOs, they do not understand the process that unfolds after they submit their application. This process is properly explained in this article. It is followed by a few terminologies or certain technical jargon that investors must understand before submitting their bidding application. A brief description of how to place IPO bids is also explained in this article.
