What is an IPO?
Initial Public Offering - IPO
Initial public offering means offering the shares of a company to the public to raise funds. It is the first time the company offer shares to the public. Anyone who feels the company has the potential to grow and wants to invest in the company can apply for the IPO but generally, most people apply only for listing gains and sell it on the day of listing because after listing the price may fall a bit, let's discuss this in the upcoming parts.
Most of the companies launch their IPO during a bull market. Recently a lot of IPOs were launched during September 2020 - January 2021 and now again a lot of companies are rushing to launch their IPOs.
Reasons for IPO
- To reduce debt.
- To expand their business.
Is it safe to invest in IPO?
Before the company launches it's IPO, it must file the Draft Red Herring Prospectus (DRHP) with the market regulator, Securities and Exchange Board of India (SEBI). Once SEBI approves the company can launch it's IPO. Since there are many laws and as it is controlled by a regulatory body it's safe. Anyway, before investing the investor must know about the company and must not apply for all IPOs blindly.
(2 mins Quiz link is at the end of the post, attend quiz after reading)
Grey Market Premium - GMP
The grey market is where shares are traded unofficially and is not controlled by any regulatory body. The shares here trade at a slightly higher price than the actual price. This price difference is called Grey Market Premium. Consider an example, the IPO share price of a company xyz is Rs.100 and the grey market premium is Rs.60. There is a lot of chance that the shares of the company may list on the stock exchange at Rs.160 (IPO price + GMP). So, if someone has got the shares in the IPO the person might have gained Rs.60. This is called listing gains and many people apply for IPO only for these listing gains.
IPO terms
- IPO date: The duration in which IPO is open for subscription.
- Issue size: The total value of the IPO.
- Fresh issue: Money collected from this fresh issue of shares goes to the company.
- Offer for sale (OFS): Money collected from OFS goes to the promoters who are selling their shares.
- IPO price: It is the price at which we can apply for the IPO.
- Market Lot: It is the number of shares per lot. One can apply only in multiples of the market lot. (Eg: If the market lot is 50, one can apply for 50/ 100/ 150... shares).
- Category wise % allocation of the offer:
- QIB (Qualified Institutional Buyers, eg: Mutual Funds)
- NII (Non-Institutional Investors, Retail investors whose application value is greater than 2 Lakhs)
- Retail (Retail investors whose application value is less than 2 Lakhs)
- Employee quota (Employees of the company can buy the shares at a discounted price)
- Shareholder quota (Parent company shareholders get more preference in the IPO of the subsidiary company)
- Basis of Allotment: On this date one can check whether shares are allotted.
- Initiation of refunds: On this date, if shares are not allotted the funds will be reversed or unblocked in your bank account.
- Credit of shares to the DEMAT account: On this date, if shares are allotted for you, they will be credited to your DEMAT account.
- IPO listing date: On this day the shares will be listed and traded on the stock exchanges. Generally, the listing will take place after 6 days from the last date of the IPO subscription.
Pros
- The probability of profit is higher.
- The waiting period for listing gains is very less. In most of the IPOs, it's only 10 days approximately.
Cons
- If the overall market sentiment is bearish, there is a risk of listing at a discounted price. Recently it happened for SBI Cards and Payment Services IPO due to COVID-19. It's IPO price was Rs.755 but listed 12% lower at Rs.661.
How to apply for an IPO?
There are two ways to apply for an IPO,
- Using UPI through the broker
- Using ASBA (Application Supported by Blocked Amount) facility through Net banking
Using UPI through the broker
- Log in to your broker's site or app.
- Go to the IPO section.
- In the list of IPOs shown, select one.
- Add your UPI ID.
- Select the number of lots.
- Select the price.
- Click submit and then a mandate will be sent to your UPI app.
- Approve the mandate.
- Now you have successfully applied for the IPO.
Using ASBA facility through net banking
- Log in to the net banking portal.
- Go to the ASBA section.
- First, register for ASBA. You may need details like Demat account number.
- Now in the ASBA section select the IPO you want to apply.
- Select the price and quantity.
- Click submit, then enter the OTP and confirm.
- Now you have successfully applied for the IPO.
How to increase the probability of allotment?
Most of the IPOs will be over-subscribed, so to increase the probability of getting an allotment try out the following methods.
- Always apply at the highest price in the price band or simply select the cut-off price.
- Apply only one lot from multiple Demat accounts linked with different PAN cards. For example, if you apply from all your family members' accounts, the probability of getting an allotment is higher. Click here to open Demat accounts for all your family members.
- If you have many Demat accounts linked to only one PAN card apply only from any one account. If you apply from all accounts all your applications will get rejected.
How to check allotment status?
IPO Registrar's website (Common Registrars):
(There may be different registrars for different IPOs, select link accordingly)
Verify helpful post Annamalai.
ReplyDeleteYou explained IPO process in a detailed manner.
Thank you so much Arun!
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