An Initial Public Offering (IPO) can be understood as a process in which a privately held corporation or other company becomes public by offering or selling a portion of its stock to the public, who are simply the general public. This will infuse new capital into the company, allowing it to raise funds for future ventures or even monetise the investments made by existing shareholders.
The High-Net-Worth Individuals (HNI), institutional investors, and the public can access the details of these share sales in the prospectus. This prospectus will provide all the details of the proposed offerings, and it is a lengthy document. With the completion of the IPO procedures, the company’s shares are listed on a recognised stock exchange and can now be traded in the open market. The stock exchange shall impose a minimum free float on the shares, which can be specified in both absolute terms and as a ratio of the total share capital being traded.
From an investor’s perspective, this is a smart move, provided the investor is intelligent and informed, mainly because it involves risk along with the opportunity it presents. Therefore, it is advisable for an investor to conduct a thorough market analysis before participating in such an investment.
Type of IPO
Basically, there are two types, and these include:
Fixed Price Offering:
A Fixed Price Offering IPO is an IPO where the company sets an issue price for the initial sale of its shares. This price will be disclosed to investors or the public who wish to invest in the company’s shares or participate in the IPO.
The demand for the company’s stocks can be determined only when the IPO is closed. Investors participating in the IPO are expected to make full payment for the shares at the time of application.
Book Building Offering:
In this type of IPO, the company offering the IPO of its stocks provides a 20% price band for the stocks to these potential investors. The price band refers to the lower and upper limits of the share price within which the company would like to go public.
Now, investors interested in purchasing these shares must bid on them before the final price is determined. The investors would do the same by specifying the number of shares they intend to buy and the amount they are willing to pay per share. Here, the lowest share price is referred to as the floor price, while the highest is referred to as the cap price. The decision regarding these prices shall be made based on the bids submitted by potential investors.
How can one invest in an IPO?
Specific steps that need to be followed by the investor for participating in an IPO can be enumerated or listed as below:
Taking a decision:
The first and foremost step that an investor should take is to decide which IPO they would like to apply for or participate in. Unlike existing investors who have sufficient knowledge about the market, company, or businesses, new investors often find it difficult and intimidating to make decisions regarding which IPO they should participate in.
To mitigate this, the investor can utilise the prospectus issued by the company in this regard. The prospectus would generally contain all the necessary details about the company’s plan and the purpose for which it is raising funds through the issue of stocks in the open market.
Funding of the investment:
Once the investor knows which stock IPO they should participate in, the next step is to decide on the funding of the investment and arrange it accordingly. For example, an investor can use their savings to fund the investment. And if this is not enough, taking loans would be another answer. Investors can avail themselves of loans from banks or financial institutions at a fixed rate of interest to fund the IPO or investment plan.
Opening a De-mat cum Trading Account:
Demat accounts provide the investors with the provision to store their shares and other financial securities in electronic format and they cannot trade in shares or participate in IPO without a Demat cum trading account. To open this account, one should provide the following details:
– Aadhaar Card,
– PAN Card,
– Address and other identity proofs.
Application Process:
An investor can apply for an IPO using a bank or trading account, as many financial organisations provide the opportunity to consolidate their Demat, trading, and bank accounts. Once this is done, the investor should be familiar with ASBA, which stands for Application Supported by Blocked Account, a mandatory requirement for every applicant to an IPO. This application enables banks to arrest funds in the applicant’s bank account.
ASBA application forms should be availed by the investor in Demat or physical form and for availing this the investor should specify his or her Demat account number, PAN, bidding details, and bank account number in the request made through an application.
Bidding:
While applying for shares in an IPO, the investor should bid, which is done in accordance with the lot size quoted in the company’s prospectus. The lot size is the minimum number of shares that an investor should apply for in the IPO.
A price range will also be determined, and investors are required to bid within this range. The investor should block the funds required for the shares while bidding and can also revise this during the IPO period. The amounts that are arrested in the bank account shall earn interest until the process of allotment has been initiated.
Allotment:
In many cases, we can see that the demand for stocks exceeds the number of stocks that were offered or released in the market. Due to this, an investor may receive fewer shares than they have applied for. Here, the banks will release the arrested funds in whole or in part, as per the number of shares allotted.
However, if the investor is allotted all the shares applied for, a CAN (Confirmatory Allotment Note) will be issued within 6 working days after the IPO process is completed. The allotted shares will now be credited to the investor’s Demat account.
Now that all the steps are complete, investors will have to wait 7 days from the finalisation of shares, unless the shares are listed on the stock market.
Eligibility for Investing in an IPO
An individual who is an adult and eligible to enter into a legal contract can be considered eligible to participate in an IPO. Some of the inevitable norms that need to be complied with by an investor shall include:
i) The investor should have a PAN card, which the Income Tax Department of India issues.
ii) The investor should also have a valid Demat Account.
iii) If the investor wants to sell these stocks on the listing, then the investor should have a Demat and a trading account.
IPOs will not only allow companies to raise the funds required for their projects or other future ventures, but also enable them to expand their equity base and increase exposure, along with the associated prestige. Investors participating in an IPO can earn handsome returns, but they should also understand that this comes with a significant amount of risk, which must be clearly understood and accounted for.
