What is an IPO? IPO Full Form

After a private limited company is unable to grow further with its own capital or borrowed money it decides to go to public to raise funds. Going through this route of raising money for the first time is called Initial Public Offering.

Defining an IPO

 An initial public offering, which is often referred to by its acronym IPO, is the process by which a private corporation begins to offer shares to the public via a new stock issuance. With an IPO, it is possible for a company to generate capital via public investors. During this transitional period wherein, a private company becomes public, private investors stand to fully realise gains from their investments as IPOs ordinarily include a share premium for current private investors. During this time public investors also have the opportunity to participate and can stand to potentially profit from the company’s growth in the future. 

To be eligible for being listed in the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE), the company has to have a minimum paid-up capital of at least Rs.10cr and post issue, the market capitalization should not be below Rs. 25cr.

Criteria for filing an IPO

Any private company can go public if they like, provided they meet the following criteria

  • The company’s operating profit should be a minimum of Rs. 15cr for at least three years in the preceding five years.
  • The company should possess net tangible assets which are nothing but physical assets plus monetary assets of at least Rs. 3cr in each of the last three years. Virtual assets which are fluctuating in nature like shares don’t count.
  • The size of the IPO cannot exceed the company’s worth more than five times.

But the above criteria are not compulsory to fulfil. If the company still wishes to go for an IPO then it has to get approval from the Securities and Exchange Board of India (SEBI), but can only opt for the book-building IPO issue. In a book-building IPO, 75% of the stock has to be sold to Qualified Institutional Investors (QII) if not the IPO will be cancelled and all the capital raised has to be returned.

The IPO process in India

How an IPO is filed from the company’s point of view involves a lot of processes and can be summarized in the point below.

  • The company approaches an underwriter, which is normally an investment bank to do the due diligence and background checks and gives a nod if the company can go ahead for applying for the IPO.
  • The company must then submit the necessary documents to the Securities and Exchange Board of India (SEBI) for examination
  • One of the important documents that it needs to prepare is the Draft Red Herring Prospectus and send it across to SEBI for approval. 
  • Ince approved, the company and the underwriters then decide the date for the IPO and the price of the shares and the number of shares to be issued to the public. In this case, there are two types of IPO filings it can follow
    • Fixed price IPO where the price of the shares are fixed and decided in advance
    • Book-Building IPO where there is a range of prices and the bidding is done within that price range.
  • Once that is decided, then the bidding process is open to the public. The interested investors then submit their applications.
  • After the bidding process is over, the company then sits and allots the shares based on the number of subscribers it has received. There are two instances that can happen here
    • When the number of subscribers is less than the number of shares available then all of them will receive the desired number of shares.
    • When the number of subscribers is more than the number of shares available then in this case the SEBI rules will apply where the company will try and accommodate as many investors as they can. If the number is still very big then the process of allotment takes place via lucky draw.
  • Once the shares are allotted then the company is officially registered as a public company and the shares are available to be traded in the stock market.

What you should know when investing in an IPO

  • Once you have been allotted shares of an IPO of the company, you are exposed to the fortunes of the company. Meaning the success and failure of the company has a direct impact on your earnings.
  • There is a risk in the investment, in the sense that there is potential for the company to give huge returns, yet it can also lead to drowning your investment. Stocks are subjected to changes in demand and supply.
  • The amount once invested, the company is not indebted to pay the capital to the investors. The situation will only arise when the company dissolves.
  • Only invest once you’ve done your due diligence. If you’re new then it is better to take the help of an expert to guide you to make better decisions.

Terminology to remember with IPO

When applying for an IPO, you will surely come across a lot of terms used often and we will cover the most frequently used ones below

  • Issuer – the company or the firm that gives out shares to the public in exchange for money to grow its operations.
  • Underwriter – These are institutions like banks, financial institutions, brokers or merchant brokers who assist in determining the price of the stock to be sold. They also play a role in subscribing to the balance shares if the IPO is not fully subscribed.
  • Draft Red Herring Prospectus – It is the document that makes all the information about the company available to the public as approved by SEBI. It contains the following information.
    • Purpose of raising funds
    • Balance sheets
    • Promoters expenses
    • Net proceeds of the company
    • Earning statements in the last three years
    • Commission and discounts of the underwriter
    • Details of the underwriters, officers, directors who possess 10% or more than the outstanding stock
  • Under subscription and oversubscription – under subscription is when the number of shares subscribed for is lower than the number of shares available. Similarly, oversubscription is when the number of shares subscribed for is more than the number of shares available for subscription.
  • Green Shoe Option – This is a situation where there is an overallotment. It is an underwriting agreement that permits the underwriter to sell more shares than what was initially planned by the company.

The final word

 IPO’s in general are a good sign as it signals that the company wants to expand its business and has a good future planned out. That leads to providing investors with handsome returns. But keep in mind that not all IPOs successful and one must be cautious before deciding to make an investment in one

​​Understanding How Shares Are Allotted in an IPO

A Brief Overview – Understanding Why IPOs are Popular 

 IPOs or initial public offerings serve as financial tools with which companies can raise public funds that they can leverage to grow and expand their business. Companies put in a lot of time and research prior to committing to going public as it leads to big changes.  

 On occasion, companies announce their desire to go public following which investors scramble to invest in the same such that they can diversify their portfolios and holdings. Companies that have big plans have the potential to bring in big returns provided they continue to be profitable in the future which is why IPOs are often flocked to. However, not all IPOs are able to generate sufficient traction in the market. 

Why is the Decision to Go Public a Big Deal?

 With an IPO, companies are able to raise capital by issuing public share ownership. This decision to go public is a major one and is only taken up provided the business model is strong enough and has the scope for ample growth in the future. 

 Only after a company has reached a certain level of maturity keeping in mind its growth cycle does it take a decision to go public or not. This is because while there do exist several benefits associated with public shareholding, there are also several regulatory requirements in place that must be fulfilled. Each stage of the IPO process, from filing an application for an IPO to said application being approved (or not) is tracked by reporters and frequently makes headlines. 

 IPOs and the State of the Market – The number of companies that issue IPOs each year varies and is indicative of the state of the economy. During the financial crisis of 2008, for instance, the IPO market performed poorly, and several companies made the conscious decision to postpone their launch into the public domain. 

Issuing IPO Shares 

 Issuing IPO shares involves the following considerations.  

  • Interest vs. Allocation – When IPOs are issued, shares are meant to be allocated among investors that are interested in the same. However, just because an investor is interested in a company’s IPO offering, doesn’t necessarily imply that they will receive the same. 
  • Determining Share Volume – Companies going public are required to ascertain the share volume assigned to each investor. Share allotments are decided in accordance with rules outlined by the SEBI and there are category-based reservations. These categories are qualified institutional buyers, non-institutional investors and retail investors. At times, the number of shares set aside for retail investors may be oversubscribed.

Understanding Instances of IPO Oversubscription

 IPOs are often oversubscribed. In order to understand what this means, consider the example mentioned below.

 Company ABC’s IPO was oversubscribed by 2 times, indicating that there was twice as much demand for the stocks. The demand for ABC’s stocks, therefore, exceeded its supply. Owing to this fact, underwriters now have the authority to adjust the price of ABC’s IPO stock and generate more capital.

However, in most instances, share prices are attractively priced in order to gain interest among investors. This strategy is frequently employed to raise funds.

In the event that oversubscription occurs, the allocation of shares is impacted as is their trade. The rules that govern allotment vary from one class of investors to another.

IPO Allotment for Qualified Institutional Investors – In the event that a company is oversubscribed to by such investors, the holdings they are provided decline. This means that if company ABC was oversubscribed 4 times, institutional investor A who asked for 100,000 shares will now only receive 25,000 shares of the company. 

IPO Allotment for High Net-worth Individuals – Here too, in the event that oversubscription arises within this category, individuals receive fewer shares than what they originally applied for. The total share allocated is equal to the total shares applied for divided by the number of times they have been oversubscribed.

IPO Allotment for Retail Investors – Shares are issued in lots which means that an investor can place bids in multiples of the lot size. This means that if the lot size of a company is 50, investors can place bids in multiples of 50 like 100 or 250. As per SEBI guidelines, in instances of retail investors bid applications amounting equally to the offered lots, each applicant receives at least one lot. The remainder is allocated proportionally. Oversubscription within this category results in computerized draws that are used to select applicants for IPO allotment. 

Understanding the IPO Allotment Procedure

As mentioned earlier, IPO bids for retail investors are done in the form of “Lots”. Meaning you can’t subscribe for any number of shares you want. Let’s now see the procedure with the help of an example.

Suppose company ABC wants to issue 1,00,000 shares in its IPO with a lot size of 5 shares per lot. This means that each lot will comprise 5 shares and the total number of lots will be 1,00,000/5 which is 20,000 lots available for subscription. Investors can only bid with the number of lots and not shares. Once the bidding date is closes, there can be two situations

  1. Total cumulative bids is lesser than the total number of bids available – in this case, each bidder will be given the number of lots subscribed for.
  2. Total cumulative bids is more than total bids available – in this case the SEBI rules are considered where maximum number of bidders are included by giving at least 1 lot.

This however leads to more sub-cases of subscription

  1. Small over subscription – in this the bidders will be allotted 1 lot of shares and the balance shares left will be allotted accordingly.
  2. Large over-subscription – In this case since there are a huge number of bidders where giving even 1 lot is a tough ask, then a lucky draw is taken into consideration. Those who don’t get it will not get a lot of shares and the money will eventually be refunded into their account.

Possible reasons for not getting an allotment

There are mainly three reasons why you as an investor did not get a lot for the bid you made

  1. As mentioned above, your number did not appear in the lucky draw
  2. You entered your details incorrectly in the IPO subscription form
  3. In case of book-building IPO, if you bid for a price lower than the allotted share price after bidding is closed then those who bid lower than the price will not be considered for allotment.

Merchant Bankers and IPO Prices

Merchant Bankers conduct pre-marketing research and analysis in order to determine the price of IPO offerings. This price is crucial as it helps lure investors which is why discounted prices are often listed. Fundamental techniques help value the company in question.

A company can choose to employ one or more merchant bankers who are responsible for varied aspects of the IPO process including document preparation, marketing, diligence, and issuance. 

IPOs and the Markets Today

The IPO market in India is a very attractive avenue for many investors to begin their journey in trading and with the growth of financial literacy as compared to a decade ago, the competition to get allotments is only going to be tougher. So it is advisable to always do proper research and select the IPO to invest accordingly as this helps in determining your end goal and how much risk you are willing to take with the company.

Understanding the Role of Depositories, Depository Participants and DP Names in an IPO

Examining the IPO Landscape Today

 The past few years have witnessed several initial public offerings crop up. More investors and traders alike are beginning to gravitate towards the primary market. Since IPOs are easy to sign up for and invest in, their popularity has surged. In the past, those hoping to invest in IPOs had to fill out and submit physical forms. Today, however, IPO applications can be made online with ease. While the medium has changed, the technical terms that govern IPOs remain the same. Some of these, such as DP can confuse individuals. In order to understand what DP names are, you must first comprehend the role of depositories and depository participants. 

 What are Depositories?

 In order to function, stock markets require investors who each possess the following accounts.  

  • A Demat account – This account is run by the depository
  • A trading account – This account is operated by a broker or by the depository participant directly
  • A bank account – This account is held and operated by the bank. 

 Investors must transfer money from their bank accounts to their trading accounts in order to purchase shares. Such transactions are conducted via the exchanges and in lieu of the money invested, specific securities are added to the investor’s Demat account.

 How Do These Securities Exist? 

 Now, you might be wondering the manner in which these credited securities exist within an investor’s Demat account. They exist in a dematerialized i.e., electronic form and aren’t handed over in any physical form. These securities lie within an investor’s Demat account which is under the control of a depository.

 Defining a Depository – A depository is responsible for storing securities that switch hands-on stock exchanges. 

 Depositories in India – India is home to the following depositories.  

  • National Securities Depository Limited (or NSDL) – This was the country’s first depository and was promoted by the National Stock Exchange in addition to the IDBI and UTI.
  • Central Depository Services (India) Limited (or CDSL) – The Bombay Stock Exchange promoted this depository and was followed by major banks like HDFC Bank and the State Bank of India doing the same. 

Advantages Associated with Depositories

 The following advantages are associated with the usage of a depository system.

  • Dematerialization – Prior to shares being held in a dematerialized form, it wasn’t easy to participate in share markets. The depository system enabled securities to exist in this electronic form which allowed for a paper-free share market. Not only is this market easier to operate, but it also allows for safer trades to occur. 
  • Ease of Exchange – Dematerialization views securities of the same class as identical thereby enhancing their interchangeability. The cost of exchanges has reduced and the speed with which trades are conducted has been accelerated with the aid of depositories being in existence. 
  • Free Transferability – Transferring securities between depositories is free and is carried out via a secure electronic system. Since this system is employed, share transfers occur instantly, however it does take T+2 days for the final settlement to appear.

 Taking a Look at Depository Participants

 Depositories can be understood as the vaults that hold securities. However, they must not be confused to be directly engaging with investors or the companies that issue said securities. 

 Who are Depository Participants?

  • SEBI-registered entities are depository participants that serve as the interface between investors and the depositories. 
  • They can be any institution such as a banking institution or a brokerage.

 What Then, is a DP Name?

 Now that you know the differences that exist between a depository and a depository participant, you should not be confused in case you see a question asking about the DP name at the time of filling out an IPO application. 

 A DP name is simply the depository participant’s name. In this case, TradeSmart will be the name of the DP that is registered with the CDSL. Therefore, the DP name box is filled out with the name of the broker. Ordinarily, the DP name follows the Depository, DP ID, and DP account. Demat account numbers issued by the NSDL and the CDSL are fairly easy to identify. Those issued by the NSDL begin with ‘IN’ while those issued by CDSL begin with a numeric digit. Under the depository section, you must choose whether your depository is NSDL or CDSL. 

 What is a DP ID?

  • A DP ID refers to the number allocated to a depository participant by their depository. This DP ID number varies from the 16-digit Demat account number assigned to those seeking to participate in the markets.
  • Ordinarily, the first eight digits of an individual’s Demat account number constitute their DP ID. 

Applying for an IPO with TradeSmart

Now that you’ve understood the meaning of a DP name and DP id, the process of applying for an IPO is pretty straightforward. An account with a broker is a prerequisite for investing in an IPO. The investment can be done by following the below mentioned steps:

  • Do your preliminary research and assess whether the IPO is worth investing in. Log in to your TradeSmart broker account with your email address and mobile phone number.
  • Login to BOX and under the portfolio menu, select the ‘IPO’ option

 

Understanding the Role of Depositories, Depository Participants and DP Names in an IPO

  • From the list of Current & Upcoming IPO’s, click on BID to participate in the IPO offer

Understanding the Role of Depositories, Depository Participants and DP Names in an IPO

  • Enter your UPI ID.
    • Please make sure the UPI ID is mapped to your personal bank account.
    • The IPO application is liable to get rejected if the person who is applying is different from the one whose bank account is used to apply. Third person bank accounts are not accepted.

Understanding the Role of Depositories, Depository Participants and DP Names in an IPO

  • Place your bid(s). Please note the below points.
    • While placing the bids, only quantity that is a multiple of the lot size is allowed. 
    • If you wish to apply at the cut-off price, simply click on the checkbox next to ‘Cutoff-price’. If you want to place a bid at a different price, you can do so by entering a price in the ‘Price’ field.
    • Once you’ve completed all these steps, click on the checkbox to confirm that you have read the RHP and other documents.
    • Click on Continue

Understanding the Role of Depositories, Depository Participants and DP Names in an IPO

  • Accept mandate request on your UPI App:

Understanding the Role of Depositories, Depository Participants and DP Names in an IPO

  • At the end of the day after submitting the IPO bid, you will receive an SMS from the exchange confirming your application. You may also check the status of your bid in My Applications tab.

Wrapping Up

 Applying for an IPO has never been easier as the process has been simplified greatly. As there are several details that are still required to be filled out while applying for an IPO, it is easy to get confused. This article, however, should have provided you with sufficient clarity such that you can apply for an IPO with ease.

What is Cut-Off Price in an IPO?

The process of a company going public is very complex as there are multiple stakeholders involved. While the steps of going public are well defined, the time taken for such a process varies and may take months or even years. But once the IPO is set to be open for the public, there are two ways the company can approach this to set a price for its shares.

Fixed price – This as the name suggests, is when the company sets a fixed price to the shares to be sold. In this case the demand for the IPO is known only after the closure of the issue.

Book building price – In this case, the company does not set a fixed price for the shares offered to the public. Unlike the fixed price method, the price is not announced in advance. Instead the company gives a range for the investors to bid and then the final price is decided once the issue closes. In this case, we deal with two more concepts known as cut-off price and floor price. What is the cut-off price? Let’s understand in more detail.

What is the cut-off price?

The offer price for an initial public offering which is set by a company in collaboration with the merchants or managers for the IPO, which could be any amount within the price bracket is known as the cut-off price for IPO stock. This, however, should not be confused with the floor price, which is the lowest rate at which bids can be placed.

The issuer must disclose a price range or a floor price within a book-building offer. The actual discovered issue price could be either above the floor price or anywhere within the pricing spectrum. The issue price is thus referred to as the “cut-off price.”

After assessing the book and investors’ demand for the stock, the issuer and lead managers make that call. When applying for the issue, prospective investors must select the cut-off option, which shows their willingness to subscribe to shares at any price discovered within the trading range throughout the book-building phase.

At the cut-off price, authorized personnel participating in the employee reservation portion and retail individual investors are allowed to bid. Investors who are not QIBs (the qualified institutional buyers which include anchor investors) or non-institutional investors are not allowed to bid at the cut-off price.

Cut-off bids are always legitimate for allotment considerations as opposed to price bids. The price bids imply that a specified price can become invalid if the applicant’s price is lower than that which has been disclosed.

Making bids at the “cut-off price” means that the retail investor receives an allocation along with the quantity of allotment which is based on demand at varying prices.

Put Things in Perspective

A cut-off price is, therefore, a price at which shares are issued to investors, to make things simpler for a layman in the field of the stock market investment. An IPO book-building issue begins with a cost range, which includes both a minimum and a maximum limit. An investor can bid for the appropriate amount for any number of stocks at a rate that is within acceptable price limits.

The two forms of IPO pricing

When it comes to IPO pricing in India, there are two methodologies. The first one is the Fixed Price Method and the other is Book Building Method. Let’s look into the details of these two.

While in a fixed-price method, the price is determined early on by the company. It opens up the initial public offering to the general masses. On the date of the issue, the firm hands out the complete information of different investors. There is no way to predict demand for shares before the issue date using this methodology.

However, the price is not predetermined at the commencement of an IPO in the book-building method. Instead, the company declares a price range at the time of the launch. The Investors then start the bidding using this very price range. At this point, it’s crucial to maintain maximum transparency; the company, therefore, publishes investor data on a daily basis.

After evaluating the book and investors’ desire for the stock, the issuer and lead merchant or manager make this decision. Only retail individual investors are allowed to apply at this price, as per the SEBI guidelines.

Comprehending the Concept

Let’s suppose that the price bracket of an IPO is determined to be between Rs.100 to Rs.110. You apply for ten shares for Rs.105 each. As you were prepared to subscribe to the initial public offering at approximately Rs.105, you will be allocated shares at the price of Rs.104, if the determined price of issue is Rs.104.

Conversely, if the calculated price of issue is Rs.106, you will not receive an allotment of stock. But if you go for the cut-off, you will be allotted shares at the price of issue.

Investment bankers proceed to work on the price determination towards the final stage of the IPO. But, when no fixed price has been calculated, there is a range of bids that occur at distinct values. The actual price is determined by the merchant bankers by calculating the average of all the bids submitted in total and this is known as the actual cut-off. It is typically the legal price that helps establish the bids for a set of stock.

Once the IPO has reached completion, shareholders who bid below the cut-off will have their money reimbursed because they are not eligible for share allotment. Those who bid higher than the cut-off earn the difference in addition to the stock allotment. Customers who desire to buy an IPO must pick the option to buy at cut-off while completing the registration process. This means that irrespective of the cut-off price, the individual is still entitled to the allotment.

 

Understanding the Different Types of IPOs

Trading since time immemorial has been a means of exchanging goods, increasing wealth, and burgeoning economies. It is a part of human existence and a way to help elevate the financial status of a community and help grow job opportunities. In modern times, however, we see that there are different methods of trading now in the stock market in the form of shares and derivatives. 

The method of transforming a privately held company into a public company is known as the Initial Public Offering (IPO). This method offers smart investors the opportunity to generate an attractive return of investment.

And before you jump on the bandwagon, it is critical that you understand the fundamentals. Because not every upcoming IPO is a fantastic opportunity. Risks and benefits are inextricably linked to each other. But if you are an informed investor, investing in IPOs can be a wise decision.

What’s an IPO and Reasons Behind its Initiation

An IPO is the process by which a private company or corporation becomes public by selling a portion of its stake to investors and is known as an initial public offering (IPO).

Typically, an IPO is usually initiated for either one or all of the following three major reasons: 

  1. a) incorporate new equity capital into the existing company. 
  2. b) raise capital or funds for near future or upcoming projects.
  3. c) to monetize stakeholders’ investments.

As soon as the formalities for the IPO are completed, the company’s shares are listed and can be freely traded in the open market. The stock exchange mandates a minimum free float on shares, both in absolute terms and as a percentage of total share capital.

The initial public offering is a smart approach by which a growth-oriented corporation offer their shares to raise capital and the overall market valuation of the said firm. Though the procedure is simple but its impacts are huge in terms of equity shares and gaining a clout. 

So, if the company does well and reaps a large profit, shareholders profit handsomely. Everyone who has invested in this company has the opportunity to acquire its fortunes in proportion to their shareholding.

Types of IPOs

There are two types of IPOs, and the distinction between them is simple and straightforward:

Fixed Price Offering or Fixed Price Issue

A fixed price issue occurs when a company establishes a fixed price for all of its shares and mentions it in the offer document.

The fixed price issue requires the company to set a fixed fee at which all of its shares will be offered to investors. A merchant banker, an entity that appraises and reduces a company’s level of risk, is hired to make this happen. This merchant bank then determines the company’s total current value as well as its future prospects. Aside from finding, they also create a risk overview of all the investments and how it would compensate the investors in the event of such a massive risk. 

They determine the price of a specific share that should be fixed in order to raise significant capital for their company after studying and conducting extensive research.

The price of the stocks that the company intends to make public is then disclosed to the investors. And if investors participate in this IPO, they must ensure that they pay the full share price when submitting their application. 

Here’s an example to help you understand this better. Suppose a reputed private marketing company wants to take over a small time niche company to expand its services and customer base. They can either borrow from the bank or raise money from the public. They decide the IPO route to maximize capital.

They approach a merchant bank who evaluates the company’s prospects to determine if the company can find any investors in the market. 

The company then files an application for an IPO to SEBI along with the DRHP or Draft Red Herring Prospectus. The DRHP contains all the information about the company and if it gets approved then the company starts advertising about its IPO to attract investors and decide a date on the IPO. 

The second type of IPO is known as Book Building Offering or Book Building Issue. Let us understand what this entails:

Book Building Offering or Book Building Issue

During the IPO process, the price of the book building issue is released. In this process, the company does not set a fixed price, but there are two price bands. 

In this case, the company launching an IPO offers investors a percentage of price band on the stocks. Before the final price is determined, interested investors bid on the shares. Investors must specify the number of shares they intend to purchase as well as the price they are willing to pay per share.

The lowest price band is referred to as the “floor price,” while the highest price band is referred to as the “cap price.” Investors interested in purchasing the shares, however, must make a bid within a specific time frame before the company sets the price. And the final decision on the price of the shares is determined by the bids of investors.

Because of the book-building issue, the company does not have a fixed price, but rather price bands. The price is discovered only after an investor’s demand is generated and recorded.

Let’s understand this with the help of an example. Suppose XYZ company, a reputed startup company, wants to go public for various reasons. And so they plan an IPO. And to do so, they approach a merchant banker. The bank analyses the company’s growth potential and financial position which will help decide the share price for what investors will pay.

After all detailed analysis and research, they come up with a decision to offload 1,00,000 shares to the public and the price for the same will range from Rs. 400 – Rs. 450 meaning the minimum price that an investor has to pay is Rs. 400.

Once the bidding is done (usually for a period of 4-5 days) the company checks the bids received. It finds that 30,000 bids have been placed at Rs. 400, and 60,000 bids have been placed at Rs. 425 and 40,000 bids have been placed at Rs. 550. Since there are bids for 1 lakh shares which are Rs. 425 and above, the ones who subscribed for Rs. 400 will not get any shares.

Some other Points of Difference

Although there are many difference in both these IPOs as mentioned above, here’s a rundown of other reasons that make them distinct from one another:

Reservations:

In a fixed-price issue, half of the allocations are reserved for investors with less than two lakhs with the remainder going to high-net-worth investors.

In contrast, in a book bidding issue, some percentage of the allocations are reserved for Qualified Institutional Buyers (QIB), another percentage is reserved for small investors, and the remainder are reserved for all other types of investors.

Demand:

The demand for a fixed-price issue is unknown until the issue is closed. Conversely, the market for a book building issue can be known every day.

Payment:

In a fixed-price issue, investors must pay a full advance payment of the share price when bidding for a share. In comparison to this, in a book building issue, the payment is made after the shares have been allotted.

While there may be different types of IPOs, what is imminent in this is that if you want to be a part of the IPO process and get allotted shares to buy and sell in the future, then you have to ensure that you have a demat account for the same.

IPO Process in India

When a company needs to raise a large corpus of funds, it approaches the general public through a process called the Initial Public Offering (IPO). But before doing so it needs to convert itself to a public limited company and make changes to its capital structure to allow new investors as shareholders. 

There is a long drawn and well defined process by which a company raises money from the primary market and gets listed on the exchanges where its investors can either sell or trade in the shares. 

In this article, we shall look at the process of how a company gets listed through an IPO.

Applying for an IPO in India

Before we discuss the process involved in getting listed, it is important to know that the entire IPO process is regulated by the Securities and Exchange Board of India (SEBI). The market regulator has a list of criteria that needs to be met by the company. 

The steps for applying for an IPO are as follows:

Appointment of financial experts 

Financial experts such as investment bankers or merchant bankers conduct the IPO process on behalf of the company, acting as intermediaries between the company and investors. They handhold the company and guide them through the entire process of meeting SEBI’s guidelines, preparing the prospectus, pricing the issue and timing the IPO. 

Registration for IPO

The investment bankers along with the company prepare a draft prospectus and a registration statement. This document is known as the Draft Red Herring Prospectus or DRHP. The most important document that a retail investor can have access to is the DRHP as it contains a wealth of information on the company. 

As per section 32 of the Companies Act, submission of a red herring prospectus by companies is mandatory. The DRHP contains all the financial information, all mandatory disclosures as per SEBI, and the Companies Act. The key components of the prospectus include:

Definitions:

It includes definitions of industry specific terms. This section might not require diligent reading if you are analysing an offer from an industry you are well acquainted with.

Risk factor:

Every business has to confront certain risk possibilities. This section factors in all the possibilities that could materially impact a company’s performance, especially post listing.

Use of proceeds:

Is perhaps the most important section of RHP. It gives information about how money raised for investors will be used.

Industry Description:

This section provides forecasts of the larger industry in which the company will function.

Business description:

Details the core business activities of the company. It talks about how a company generates its profits.

Management:

Data and details about key management personnel, promoters and directors are provided in this section.

Financial information:

This section provides the auditor’s report and other financial information.

Legal and other information:

This section details the lawsuits against the company along with miscellaneous information.

Verification:

This step involves verification by SEBI as it looks for errors and discrepancies. Only after SEBI approval can a company set a date for its IPO.

Applying to the stock exchange:

The Company then applies to the stock exchange where it wants to get its stocks listed.

Creating a buzz:

Companies strive to create a buzz in the market before its IPO is open to the public. The company advertises the impending IPO in order to attract potential investors. The company management goes on a roadshow to sell the issue by meeting various funds, brokers and big investors. Media interaction is also part of the road show in order to advertise the key features of the company and highlight its credentials.

Pricing:

Pricing the IPO is an important task for which the company has two options of going through the IPO – a fixed either through fixed price offering or a book building offering. 

In the case of book building offers a price range of 20% is announced and investors can place their bids within the price bracket. On the other hand in the case of fixed price shares the price of a company’s stock is announced before-hand. 

As far as the bidding process is concerned the bid is supposed to be placed as per the Lot Size which is the minimum number of shares to be purchased. The company also provides the IPO Floor price and the IPO Cap price. The former is the minimum bidding price and the latter the highest. The bid is usually open for 3-5 days and investors have the option of revising their bids within the time frame. When the bidding process is complete, the company decides the cut-off price i.e. the price at which shares will be sold.

Allotment of shares:

After the completion of the bidding process, the company decides the number of shares to be allotted to each investor. The company also ensures that no internal investors participate in the IPO trading process. This prevents manipulation or fraud. IPO stocks are allotted to bidders within 10 working days of the last bidding date.  

 

Online and Offline Methods of applying for an IPO-

The online method of applying for an IPO is through a stock broker’s website. This is the most convenient method of applying for an IPO. The process to apply for an IPO from TradeSmart is also very easy and simple. The entire step-by-step method is detailed out here so that you don’t face any issues and is done seamlessly.

The offline or traditional method of applying for an IPO is by filling in a physical application form and submitting it at the nearest collection centre. You will have to approach your bank or your stock broker, fill out the application form. Ensure that your details and your PAN and demat account number are correctly mentioned if not you will not be able to get any allotment of shares. Once you check the details, submit the form along with the cheaque of the amount to your bank or broker and they will ensure the funds are kept aside for allotment purposes.

Note that whether you apply for an IPO online or offline, it is mandatory to have a demat and trading account in order to store the shares and sell them if you wish to in the future. TradeSmart demat account is easy to open which hardly takes 10 minutes to enter the world of trading and investing.

Pre-IPO Investing – Importance of Investing in Pre-IPO Companies

A key factor in the growth of a company is capital. Many of us have business ideas, but we do not have money to convert the idea into a business. Even when we do have enough to start a business, we would find it difficult to raise growth capital. Many small and medium enterprises the world over have remained small because of a lack of capital. 

 

Over the last few years, thanks to excess liquidity in world economies, money is now chasing business ideas. India has become the favourite destination for private equity firms. More graduates in India, especially engineering graduates, are looking at joining a start-up company or starting a company of their own rather than an established one.  

Private equity funds are not only providing capital to these companies but also providing strategic guidance. Many companies go through multiple rounds of funding or even mergers and acquisitions before they reach the stock market.

When some of these companies reached the stock market, investors who subscribed to the IPO and made money on its listing are now yearning for more. There were some IPOs that did not do well, nonetheless the search for investing even before the companies reach the market is increasing.

Enthused by short term gains and news of investors making bumper profits on their listing, there is increasing interest in going one step back, that is investing in these companies at a pre-IPO stage.

While the idea is good, it is not without risk. We are only looking at the success stories. Less than one company in ten ever reaches the IPO stage, despite the funding. 

Despite the low success rate, private equity funds are making money because they invest in numerous companies. The few companies that reach the IPO stage generate enough money to take care of the losses in the others and still leave enough on the table. 

Let’s have a closer look at pre-IPO funding.

What is pre-IPO funding and how does it work

  • As the name suggesting pre-IPO funding involves funding a company before it approaches the primary market to get listed. 
  • This can be just a few years before the IPO or many years. 
  • Even if an investor invests after being told that the company is planning to get listed in a short time, there is no guarantee and such decisions have many variables including market condition, investor appetite and the company’s financials. 

For an individual investor, especially a retail investor, direct investing in a company at a pre-IPO level is difficult. This is mainly because companies look for the big-ticket and limited number of investors to fund them. They are ideally on the lookout for investors who understand their business and can add value if possible. Private equity firms or business houses that can add value or help their business grow are normally preferred. 

Should one invest in pre-IPOs

Unless one has excess money, investing in pre-IPOs is risky. 

  • As these companies are not listed, there is little public information that can help in monitoring them. 
  • Further, these are not transparent companies and are not obliged to part with financial information as the listed ones are. 
  • They are not bound by the laws that listed companies are in terms of disclosing information. 
  • No research reports are available on them. 
  • More often than not, chances are that these companies may not make it to the IPO level. 
  • Furthermore, one does not know the value of their investment, unlike a listed company where the share price is available. 
  • Also, the investor cannot exit his position if he needs the money or is not happy with the company’s performance. 

How do you invest in pre-IPO companies?

In case an individual managed to invest in a pre-IPO company, the one way he can make money is when the stock is listed. He will need to check whether his investment is in the lock-in period. If it is, he will have to wait for the lock-in period to be over before he can offload his shares. 

However, there are avenues open for retail investors now. Some asset management companies (AMCs) have announced funds that will invest in companies requiring pre-IPO funding. This is a safer route for retail investors, as the fund manager and his team of analysts will be in a better position to understand the business and monitor the business. 

Investing in pre-IPO is not for the fainthearted. Unlike an investment in an IPO or the secondary market, where the exit is easy, pre-IPO investments do not have an exit route unless they are listed. 

Investment is like buying a partnership stake in a business. To do so, one needs to understand the business closely. Further, most companies in the pre-IPO stage that need investments are generally the new-age ones. These companies mostly work on a cash-burn model, that is, they are not profitable and need a steady and heavy dose of funds inflow till they achieve some size before gaining some market share. 

Investing in pre-IPO companies requires patience. Returns from such companies, if at all, will take some time. Even when these companies are listed, one cannot be sure that the market would be as generous in giving them the valuation that a pre-IPO investor did. 

Having said that, if one manages to get their bet right and invest in a company that turns out to be a strong performer, it is nothing short of winning a lottery.

What is Face Value in IPO?

In order for a business to grow, capital is needed. There are two ways in which money can be raised–equity or debt. Equity is the capital that the entrepreneur or the promoter or group of promoters bring in a proprietary partnership or a private limited company. Debt is the component that lenders loan to the business, which is to be repaid over a fixed tenure. 

When a private limited company intends to raise more capital through the primary market, it has to go through the IPO route or the Initial Public Offering route. Here, the company seeks funds through a process where the general public can invest in the company. 

By investing in the company, the public is essentially becoming a partner in it. In order to seek such partners, a company has offered a price at which it is willing to take them. This offer price at the time of an IPO has two components–Face Value and premium. 

In order to understand these terms, let’s first dive deep into understanding the IPO process. 

What is the IPO process?

  • IPO is the process through which a private limited company raises money from retail individuals and institutions and gets listed on the bourses. 
  • The company, in this case, known as the issuer, approaches a merchant banker to help raise funds. 
  • The merchant banker handholds the company through the process of raising funds by meeting all the requirements set down by the market regulator, the Securities Exchange Board of India (SEBI), and the stock exchanges. 

It is the merchant banker, who through their experience and market study, informs the issuer on the pricing that the company can charge. Looking at the mood of the market, the company’s fundamentals and the relative valuation of its peers, the merchant banker suggests the issue price. 

Face Value of an IPO

  • The price at which a company raises money from the market has two components–face value and a premium. 
  • It is the premium at which the company should price its issue is what the merchant banker advises the company. 
  • The face value is normally fixed by the company. 
  • A Face Value is the par value or the nominal value of one share. 

A company can have a face value of as low as Re 1 and any number above that. Most companies in India have a face value between Re 1 and Rs 100. The most common numbers apart from these two are Rs 2, Rs 5, and Rs 10.

Face value is also the minimum price at which a company can raise money. If a company having a face value of Rs 10 decides to raise funds at the face value or at Rs 10, it is said that the company is raising money at par. 

Most companies have raised money at a face value of Rs 10 and a premium above it. If the share price of the company increases in higher four digits or five digits, it is observed that the trading volume in the company reduces in the secondary market. In order to attract more investors to the company and have a wider investor base, face value is reduced. 

A change in face value impacts the earning per share (EPS) of the company, which in turn impacts the price to earnings or PE ratio, one that is among the most important valuation ratio monitored. 

The dividend announced by the company is also based on the face value. If a company has a face value of Rs 10 and announces a dividend of 30 percent, it means that the dividend payout will be Rs 10 * 30% = Rs 3 per share. 

Conclusion

Understanding of face value is very important both at the time of IPO when the company is raising funds and also at the time when it is being actively traded in the secondary market. A number of corporate actions like dividends, rights, and splits of shares are announced on the basis of face value. Important ratios and valuation parameters use face value as an important component.

How to Apply for IPO Using UPI?

Unified Payments Interface (UPI) has now become one of the most preferred electronic payment modes in our country. The adaptation has been remarkably quick and across segments.

UPI is designed by the National Payments Corporation (NPCL) an entity regulated by the Reserve Bank of India (RBI). It is a system built on the architecture of Immediate Payment Service (IMPS) system that allows the transfer of money between two bank accounts instantaneously i.e., in real-time. UPI finds its application not only in merchant payments but also peer to peer transfers.

Investing through the digital medium

Since UPI is a real-time system that allows a bank-to-bank transfer and a mobile phone is enough to do any transactions including investing in shares and stocks. The Securities Exchange Board of India (SEBI) has made it mandatory for retail investors who apply for an Initial Public Offer (IPO) through an intermediary to use the UPI mechanism. 

IPO and its various forms

IPO is a new stock issuance by a private company to the public. IPO has many forms or sub-components namely

  • Offer for sale wherein an existing shareholder offers his stake in the company
  • Follow on offer (FPO) is the additional issuance for raising of funds for an already listed company
  • Rights issue also is done by an existing company to raise additional funds

All the above can now be applied through the UPI mechanism.

How to get a UPI Identification (UPI ID)

Step-1 Download any UPI-enabled bank app or any third-party UPI app from the google play store like Gpay, PhonePay or PayTM, etc.

Step-2 Thereafter select the preferred language, mobile number, and the bank in which you hold an account 

Step-3 Create your unique UPI ID 

Step-4 Link the unique UPI ID to your bank account (this mobile number must be the same one registered with the bank as the bank will verify it through an SMS)

Step-5 Create an MPIN (mobile banking personal identification number) for authorising transactions made through the UPI

Step-6 After this you would have successfully created the UPI ID

Applying for an IPO through a UPI

Now, let us understand how to apply for an IPO with the UPI.

Needless to say one needs a demat account and a broking account to apply for an IPO. 

Step-1 An IPO applicant has to login through a broker website or broker app to subscribe to an ongoing IPO

Step-2 Select the IPO for application and read Draft Red Herring Prospectus (DRHP) and the details of the IPO carefully before applying. One needs to take note of the following details

  • Offer start date— This is the date when the IPO application bidding starts
  • Offer end date— This is the date when the IPO bidding ends
  • Finalisation of allotment date—This is the date by when the allotment is finalised
  • Refund initiation date—This is the date by when your mandate will be revoked and the funds will be unblocked
  • Demat transfer—The date by when the shares will be transferred into the demat account
  • Date of listing—The date on which the shares will be listed on the exchanges
  • End of mandate—The date on which the mandate will be revoked and the funds in your bank will be unblocked

Step-3 Fill the IPO application with

  • UPI ID
  • Select your investor type-Individual investor
  • Number of lots
  • Fill in your bid rate or tick mark the cut-off rate if you want to subscribe at the cut-off rate. After this, the total amount that will be blocked will be displayed.

Step-4 Hit the submit button. Once the application is submitted the UPI mechanism will begin. 

  • The subscriber will receive a block mandate request in his mobile app
  • The subscriber needs to accept the mandate received on his mobile and enter the UPI PIN 
  • After this, the amount payable for the IPO is blocked
  • On full allotment, the amount is debited and the shares are transferred demat
  • On partial allotment, the partial fund is unblocked and the partial shares are transferred to the demat
  • On no allotment, the whole amount is unblocked. The funds will be unblocked after the date of expiry or the end of the mandate date.

UPI-based IPO application is hassle-free. Gone are the days of physical submission, writing a cheque for an IPO application by using ASBA (Application supported Blocked Amount) forms and their related issues. Now IPO application is an instant, real-time and seamless application. Happy investing.

How to Check IPO Allotment Status?

IPO and its significance

For decades, the term “Initial Public Offering” has been a buzzword among investors. The procedure by which a public firm issues new stock to the public is known as an initial public offering (IPO). It is carried out in order to raise capital from public investors. 

IPO Allotment

Before we can even check the allotment of an IPO, it is important to have the following

After having the necessary accounts and the funds to pay for the shares one needs to get down to the process of applying for the shares. 

  1. Applying for the IPO – This can be done online and offline. The market regulator SEBI (Securities and Exchange Board of India) has made it mandatory to have a “Blocked amount facility” compulsory for this process where your amount will be set aside and only if this process is followed will you be considered for receiving an allotment.
  2. Allotment process – Allotment is done based on the number of shares available and the number of investors who have subscribed for the IPO.
  3. Allotment – For the shares to be credited to one’s Demat account it takes about seven days, though SEBI is asking merchant bankers and companies to cut short this time. The allotment status and process can be checked from the brokers website or NSE and BSE website as well. We will cover the process in more detail below.

IPO Allotment Status

The allotment status tells you everything you need to know about the quantity of shares allotted to an investor in a public offering (IPO). The registrar of the IPO is in charge of the IPO allotment procedure. The allotment date for an IPO is normally the date on which the status is made public. Once the allotment has been completed, investors can check the status of their IPO by going to the registrar’s website. The BSE, NSE, NSDL, and CDSL also send out emails and SMSes to IPO investors informing them of the revised IPO allotment status.

  1. Checking the IPO Allotment process from broker site

Every broker’s website today has the facility of showing all the IPO allotment details and the status of the allotment for those who have invested. TradeSmart also offers this facility and youc can check the allotment status in the below steps.

Step 1: Open the TradeSmart website or just click here to directly go to the allotment page.

Step 2: Once you open the above link, you will see a page that looks like the one below.

Step 3: Locate the name of the IPO you had bid for from the list and click on the “View Status” option on the right hand side. You will get a pop up screen that will ask for various details.

Step 4: Fill in all the details required with your PAN and application number and click on “Search”

Step 5: The details of your allotment will flash and you will get a clear status of whether or not the allotment is done or is still pending.

  1. Check allotment on Registrar website
  • The registrar for the IPO is Link Intime India Private Limited and the shares are proposed to be listed on the BSE and NSE.
  • Once you come to the website home page, click on “public issues”
  • Once you click that, you will see a dropdown option. Select the company name.
  • You then have the option to fill out either your PAN, application number, DP/Client ID or account number.
  • Click on search and you will see the status of your allotment
  1. Check allotment status on BSE
  1. Click on the link to go to the BSE page https://www.bseindia.com/investors/appli_check.aspx.
  2. After landing on the page, select Equity and then from the dropdown, select the company you want to see.
  3. Then you have to enter your application number and PAN number next.
  4. Click on the Search button and the details will be furnished to you.

Different types of allotment status

The quantity of shares applied for an IPO and allocated to the investor is indicated by the allotment status.

Allotted – This indicates that all shares applied for have been allotted.

Partially allotted – This means that fewer shares have been allocated than what you applied for; for example, if investors applied for 10 lots of the XYZ IPO, only 6 lots have been allocated, while the remaining four lots have not been done.

Non-allotment – This signifies that the investor has not been assigned any shares. This could happen for a variety of reasons, including: • your application was not chosen in the fortunate draw; • the issue price is higher than your bid; • an error in the PAN or DEMAT account number provided; or • several applications submitted under the same PAN.

How the registrar decides on the allotment

Situation 1: When the total bid is less than the shares offered by the company

In this case there is no intervention by the registrar and each one who bid will get the allotted shares.

Situation 2: When the total number of bids is greater than or equal to the number of shares.

In this scenario, the registrar will need to plan out how the allotment is going to take place.SEBI has mandated that every applicant must be given at least one lot. 

Depending on the margin by which the IPO is oversubscribed, the allotment process varies.

  • Small Margin – If the oversubscription is only by a small margin, then minimum lot will be distributed to all applicants
  • Large Margin – In case where shares are oversubscribed by a very high margin, the registrar allots it via a lucky draw system. For those who don’t get an allotment will get a refund in the money.

Investors would get a refund of their application fee before the UPI mandate expires, as per the IPO deadlines, if there is no allocation or only a partial allocation. When you apply for an IPO, your bank places a hold on a sum in your account equal to the bid size, which is debited from your account after the final allotment. Depending on the status of your application, the bank will conduct a full or partial refund, which usually takes one or two days to reach your account.

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