All about Initial Public Offering
Initial Public Offering or IPO can be understood as a process in which a privately held corporate or such other company becomes public by offering them or selling a portion of their stock to the investors, who are simply the public. This will infuse new capital into the company such that they can raise funds for any future ventures or even monetizing the investments which were made by the existing shareholders.
The High-Net-Worth Individuals (HNI), institutional investors, and the public can access the details of these shares sales in the prospectus. It is this prospectus that will provide all the details of the proposed offerings and is a lengthy document. With the completion of the procedures of IPO, the shares of the company get listed on a recognized stock exchange and can now be traded in the open market. And the stock exchange shall impose a minimum free float on the shares which can be both in absolute terms and as a ratio of the total share capital being traded.
As far as an investor is concerned this is a smart move provided such an investor is a smart and informed investor, majorly because this involves risk along with the opportunity held by it. So, we can say that an investor should do a good market analysis before such participation is made.
Type of IPO
Basically, there are two types and this includes:
Fixed Price Offering:
Fixed Price Offering IPO is the IPO where the company sets an issue price for the initial sales of their shares. This price will be made known to those investors or the public who would like to invest in the shares of the company or participate in the IPO.
The demand for the stocks of the company can be determined only when the IPO is closed. The investors who are participating in the IPO shall be expected to make full payment of the price of the shares when making the application itself.
Book Building Offering:
In this type of IPO, the company which is making the IPO of the stocks offers a 20% price band on the stocks to these potential investors. The price band here means, the lower and upper limit of the share price within which the company would like to go public.
Now the investors who are interested to invest in these shares shall bid on the shares before the final price is fixed. 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 shall be referred to as floor price while the highest would be referred to as the cap price. The decision regarding both these prices shall be made on the basis of the bids made by the potential investors.
How can one invest in IPO?
Certain steps which need to be followed by the investor for participating in an IPO can be enumerated or enlisted as below:
Taking a decision:
The first and foremost step which should be taken up by an investor would be to decide which IPO he or she would like to apply for or participate in. Unlike existing investors who have enough knowledge about the market, company or businesses, the new investors find it difficult and often intimidating to make decisions regarding which IPO he or she should participate in.
And for mitigating this the investor can utilize the prospectus which is issued by the company with this regard. The prospectus would generally have all the necessary details about the company’s plan, and the purpose for which they are raising funds through the issue of stocks in the open market.
Funding of the investment:
Once the investor knows which stocks IPO he or she should be participating in, the next would be to decide about the funding of the investment and arranging the same. For example, an investor can use his or her savings for funding the investment. And if this is not enough, taking loans would be another answer. The investors can avail loans from banks, financial institutions at a fixed rate of interest for funding 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. For opening this account, one should provide the following details:
– Aadhaar Card,
– PAN Card,
– Address and other identity proofs.
An investor can apply for IPO using a bank or trading account, as many financial organizations provide with an opportunity to bunch your Demat, trading, and bank accounts. And once the same is done with the investor should be familiar with ASBA which means Application Supported by Blocked Account, which is a mandatory open 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.
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 nothing but the minimum number of shares which should be applied for by an investor in the IPO.
A price range shall also be decided and the investors require to bid within this price range. And the investor should block the funds required for the shares while bidding and can also revise the same during the IPO period. The amounts which are arrested in the bank account shall earn interest until the process of allotment has been initiated.
In many cases, we can see that the demand for the stocks goes up than the number of stocks which was offered or released in the market. Due to this, an investor might get a lower number of shares than he or she has applied for. And here the banks will release the arrested funds in an entire or partial manner as per the number of shares allotted.
But if the investor is allotted with all the shares applied for then a CAN (Confirmatory Allotment Note) shall be issued within 6 working days after the IPO process is done. Now the allotted shares shall be credited to the investor’s Demat account.
Now all the steps are done with the investors will have to wait for 7 days from the finalization of shares unless the shares are listed on the share market.
Eligibility for Investing in an IPO
An individual who is an adult and is eligible to enter into a legal contract can be held as eligible for participating in IPO. Some of the inevitable norms which need to be complied with by an investor shall include:
i) The investor should be having a PAN card which is issued by the Income Tax Department of India.
ii) The investor should also be having a valid Demat Account.
iii) If the investor would want to sell these stocks on listings, then the investor should be having a Demat and trading account.
IPOs will not only allow the companies to raise funds required by them for their projects or such other future ventures but also allow them to enlarge their equity base and the exposure along with the prestige. The investors participating in IPO can earn handsome returns, but should also understand that this amounts to a good amount of risk which should be clearly understood and accounted for.