How to Bid for an IPO?

Every time the equity market is in a bull phase, unlisted companies  want to get listed by raising funds to meet their growth requirement. The way in which a company can get listed is by going through the IPO route. 

The long drawn process of making a company ready for IPO after getting all the permissions in place requires many parties to work together. These include Merchant Bakers, Underwriters, Advisors, media consultant, investor relation companies among others. 

With time and effort the company manages to get all the necessary clearance for the IPO. It is now ready to hit the market. 

While the company is ready, what about the investors, what should they be doing to invest in companies through the IPO route. Let’s have a closer look.

How to bid for an IPO?

For any new investor, if they wish to subscribe or bid for an IPO then there are certain things to have in place. 

  • The choice of IPO should be selected based on research and homework, sound advice from banks or broking firms or other reliable sources.
  • A PAN card, address proof attested and other documents as specified by your DP
  • A designated bank account, a demat and trading account with a registered Depository Participant (DP)
  • A duly filled and signed form from ASBA. This is mandatory as it authorizes the banks to block the funds in your account for this particular process. 
  • In case you change your mind, you can also withdraw from the IPO by contacting your broker
  • You have the option of investing at a cut-off price or making a bid. The maximum bids you can make is 3 at once.
  • Fill out the details of your demat account and number of bids you are making with the broker and submit
  • After submitting, you will get details such as the IPO allocation number and other transaction details
  • If the shares are allocated, it will automatically reflect in your Demat account
  • If there is no allocation, then you will get a refund of the money in your bank account.

Offline IPO Bid Process

  • You can visit the bank or your stock broker agent 
  • Fill in the form with all the necessary details and mention the number of stocks you wish to purchase
  • Ensure you mention your 16 digit Demat account number and the bid price and attach the cheque for payment. Ensure you have sufficient funds in your account
  • Shares will automatically be deposited into your Demat account if you get the allotment. That will complete the bidding process.

IPO Bidding Process in detail

  • How much to bid? – When bidding for an IPO, it is not possible to just buy one share or buy a specific number of shares. The company provides a minimum number of shares known as lots. When applying you have to mention the number of lots you wish to bid for. For example, if a lot comprises 100 shares then you can bid for a minimum of 100 shares and in multiples of 100 thereafter. Ensure that you have sufficient funds in your account for the same as if you purchase more than your budget then you may not get any of the lots at all. The maximum subscription amount for retail investors is Rs. 2 lakh.
  • Where to bid? – You can bid online for an IPO through your online Demat account. Most if not all brokers offer this facility. For TradeSmart you can check out the process of doing it here. You can also bid offline by visiting the bank or brokers office and provide all the necessary documents. 
  • What price to bid at? – Wait for the book to build up before placing your bet. If other investors are bidding at the cut-off price, it is better to place your bet at this price otherwise the chances of allotment will diminish. 
  • Bidding online – In today’s digital age, all broking firms have IPO pages on their websites and apps to apply. Once you log in, you can place the number of bids you want. For a retail investor, the maximum is three bids. To know how to bid for an IPO through TradeSmart, you can have a look here.
  • Getting allotment – If the IPO is a successful and oversubscribed you will receive fewer shares than what you had bid for. In case of a huge oversubscription, chances are you may not get any allotment. In case you get shares allotted, you will receive a Confirmatory Allotment Note (CAN) within six working days from the date of IPO closure. If the IPO is oversubscribed then the allotment is made in a way that everybody has to get at the least one lot. If the IPO is extraordinarily oversubscribed then even giving one lot to every investor is hard so the allotment is carried out via fortunate draws, that’s computerised and absolutely impartial.

How to bid for an IPO? Here are few pointers that may assist you:

• Always do a thorough research before finalizing on the IPO you want to invest.

• Wait for the book to build up before applying. Check where maximum applications are coming and apply accordingly. 

• Apply through more than one account by opening a demat account of your own circle of relatives’ members.

Possible Reasons for Not Getting an Allotment

1. The bid which you made for the IPO becomes invalid and removed because of the wrong Demat account number, wrong PAN number, or more than one package submitted for the IPO.

2. Your call wasn’t picked out in the case of a big oversubscription.

3. While dishing out stocks’ agencies don’t allot to traders having extraordinary pan numbers for Demat, Bank account, and UPI Id.Know that while selecting which IPO to bid for may be a time consuming process more importantly if you want to successfully be eligible to apply for an allotment then you must have a demat and trading account with you as fundamental eligibility.

How IPO Works?

Meaning of IPO

The process through which a public limited company increases its shareholder base by raising money through the general public and gets itself listed is called an IPO or Initial Public Offering. 

The capital raised through the IPO route is used for various purposes like utilising it as growth capital, using it to reduce debt, or for acquiring companies. 

Types of IPO

Different type of IPO is defined by the way the pricing of the issue is done. There are two ways in which funds can be raised through an IPO – fixed price issue and book-building issue.

Fixed Price Issue – In this type of IPO, the company would set a fixed price at which they want the subscribers to invest in their company. It’s a take it or leave it offer. The advantage is that the company knows the cost of raising money and the investor knows that they will receive the shares at the same price as everyone else who has applied for the IPO. 

Book Building IPO – The book-building process on the other hand gives the investor a choice at which he wants to subscribe to the issue. The company opens a virtual book in which all the offers of investors are accepted at various price points. In case of an oversubscription, the company will start allotting shares to the highest bidder and then work itself lower. 

How the IPO process works

The process of getting a company listed is long drawn and requires meticulous planning. SEBI has mandated Merchant Bankers to help guide companies through the entire IPO process. 

Step 1: Select a Merchant Banker 

The first step a company undertakes to get listed is to search for a good merchant banker who will help them to meet the strict guidelines laid down by SEBI. The merchant bankers are registered with SEBI and know the rules and regulations that a company will need to meet before it can get SEBI’s approval. 

The merchant banker along with Advisors to the issue helps the company to walk through the maze and help them decide the ideal amount that can be raised. The team works on the valuation at which to price the issue and the timing of the issue. 

Step 2: Registering for an IPO

After all the boxes have been ticked in terms of following the rules, the merchant banker sets about preparing a Draft Red Herring Prospectus (DRHP) which it submits to SEBI while registering the company’s IPO. 

Some of the important information covered in the DRHP is

Definitions – Contains definitions of industry specific terms.

Industry description – This contains the working of the company in the overall industry segment including information like forecasts and predictions about the industry.

Promoters – The complete details of the person or persons who have promoted the company along with their capital history. 

Management details – Contains all the details about the management and leadership team that run the company.

Financial statements – the document provides information about the financial condition of the company along with the auditors’ report.

Capital Structure – This provides details of the equity share capital which includes authorized share capital and paid up capital before the offer. The entire capital history of the company is mentioned along with funds raised at various times using different instruments and their pricing, new shareholders added, bonus shares, among others.

Industry overview – as mentioned above, the same analysis should be checked as the future of the industry and the company will determine whether to invest in the IPO or not.

Objective – this talks about what the company plans to do with the money that it wants to raise which can be an expansion or paying off debts to investors.

Risk factors – While the risk factors will be a bit generic it is important to see them in more detail. There can be cases where the company might be facing a number of legal issues including criminal, huge debts, patent infringement among others. A company is expected to mention all the risk factors, internal and external in the DRHP. 

Step 3:Verification by Securities and Exchange Board of India (SEBI)

The DRHP is verified by SEBI checks if all the guidelines are followed and the background of the promoters and the company. In case of any changes, the market regulator informs the merchant banker and the company who after making the required corrections resubmits for verification. The process goes on till SEBI clears the company for the issue. 

Step 4: The Roadshow

After all the formalities are completed, the merchant banker or a team of merchant bankers are ready to hit the road taking the company management to meet institutions, big investors, brokers, and media. The idea is to explain to these investors the rationale of investing in the company. 

Research analysts, based on their analysis come out with their recommendations on these IPOs, which are then circulated among the broker’s clients. Institutions on the other hand based their buy decision on their own analysis and management interaction. 

Roadshows are an important part of an IPO process, especially for bigger companies as investors are not aware of them and would like to understand the management’s and promoters’ body language. 

Step 5: Pricing the IPO

After the roads and gathering market intelligence, the merchant bankers and company management decides on pricing the IPO. Various quantitative and qualitative approaches are taken to fix the IPO price. 

The companies have a choice of going in for a Fixed Price IPO or taking a Book Building approach. In the case of a fixed price route, the price is announced beforehand, but in the Book Building approach, a lower and upper band is announced. Investors can choose a price between these two bands to apply for the issue. While bidding, the investors have to bid as per the company quoted Lot Price. 

Step 6: Allotting of shares.

The booking is typically open for three to five working days during which time investors can place their bids. After the book is closed the company will first allot shares to the highest bidder and then move downwards. 

After the IPO is launched, all bids for the shares are registered online. All the ineligible bids are eliminated through an online process. 

In case the successful bids are less than or equal to the number of shares offered than every applicant who has applied will be assigned shares. But if the successful bids are more than the number of shares offered then there is a proportional allotment of shares.

The process to apply for an IPO through TradeSmart for an investor is fairly straightforward and easy. You can have a look at the detailed process here.

How the IPO Process works for investors

Select how you intend to apply — online or offline. 

In an online process, the amount equivalent to the shares applied for and the price at which it is applied is blocked and is only debited after you receive the allotted shares. In case of no allotment, the entire amount is refunded to the account.

For the offline process, one has to approach the bank/broker office and fill out the application form with all your details for the IPO.

IPO vs FPO – Difference Between IPO and FPO

There are various ways in which a public listed company can raise money from the equity market. Among them are IPO (Initial Public Offering), Rights issue, placements of shares like the Qualified Institutional Placement (QIP), or the Follow-on Public Offer (FPO). 

In this article we shall look at two ways in which a company can raise funds from the general public – that is the IPO and FPO. 

What is IPO?

IPO is a process by which a public limited company approaches the general public for funds and widens its shareholder base by getting listed. 

After following multiple steps and guidelines issued by the market regulator SEBI, a company is ready to raise funds from the public. 

The merchant bankers help the company meet the strict guidelines set by the market regulator and also help market the issue. The merchant banker takes the company management on a roadshow to meet various fund houses, brokers, investors, and media to promote the issue. 

The fundraising process is considered complete only if the issue receives the minimum required subscription. In case of an oversubscription, the shares are allotted using various mechanisms as laid out by SEBI. 

After the shares are credited to the Demat account of the subscriber, he or she can trade the share in the stock exchanges. 

Types of IPO

Different type of IPO is defined by the way the pricing of the issue is done. There are two ways in which funds can be raised through an IPO – fixed price-issue and book-building issue.

  • Fixed Price Issue – In this type of IPO, the company would set a fixed price at which they want the subscribers to invest in their company. It’s a take it or leave it offer. The advantage is that the company knows the cost of raising money and the investor knows that they will receive the shares at the same price as everyone else who has applied for the IPO. 
  • Book Building IPO – The book-building process on the other hand gives the investor a choice at which he wants to subscribe to the issue. The company opens a virtual book in which all the offers of investors are accepted at various price points. In case of an oversubscription, the company will start allotting shares to the highest bidder and then work itself lower. 

What is FPO?

An FPO or a Follow-on public offer is the second route through which a company can raise money from the public. The major difference is that the company raising money is already listed. The company goes through a similar but less stringent process of certification by the market regulator as does a company approaching the market for an IPO before they are granted permission to raise money. 

Types of FPO

There are two types of FPOs i.e. Dilutive FPO and Non-dilutive FPO.    

  • Dilutive FPO–When a company raises funds by issuing new shares such a process is called dilutive FPO. The equity capital of the company will increase on account of the new issuance of shares. Such fundraising are done to meet the company’s capital expenditure requirement or debt-reduction, inorganic growth, or any other purpose.      
  • Non-dilutive FPO–In the non-dilutive type of FPO, one or more than one
  • stakeholder of the company is exiting. Their shares are offered to the general public who get an opportunity to be part of the company as shareholders. In this kind of FPO, there is no dilution of equity capital as the shares sold are of the existing shareholders. Further, the company also does not benefit from non-dilutive FPO because the funds raised are directly credited to the seller. 

Differences between IPO and FPO: 

The differences between IPO and FPO can be outlined along several parameters:

Listing statuus: IPOs are required for raising capital by issuing new shares to the general public to meet the various needs of the business which may include inorganic growth, debt reduction, or growth capital. 

In FPOs shares are issued to raise capital for more or less the same as in the case of an IPO. The main difference is that the company issuing FPO is already a listed entity. 

Risk: In the case of IPOs the public history of the company is missing and it is difficult to judge the management’s capability. The risk involved in an IPO is higher.

In the case of FPOs, the company has some public history and would have been covered in media and research analysts. The fear of the unknown in not present in FPOs.

Pricing: Pricing in the case of an IPO is determined on the feedback given by the merchant banker to the company. What can the market absorb is the yardstick of fixing the price.

Pricing of an FPO is more transparent as it is determined by a fixed formula prescribed by SEBI.

Meaning IPO is offering securities to the public for subscription for the first time FPO is offering securities to the public for subscription by a publicly traded company.
Capital Raised From the public for the first time Subsequent public contribution
Price Fixed or variable range Depending on the number of shares increasing or decreasing and is market driven
Share Capital Increases because of fresh capital being raised from the public In case of Dilutive FPO the number of shares increase and in case of non dilutive FPO the number of shares remains the same.
Risk Has more risk since it is the first time the company is going public Is relatively less risky since the company is slightly more stable and already listed
Types Equity shares, offer for sales  and preference shares Dilutive offering and non dilutive offering

Now that you know something about IPO and FPO, you should also know that if you want to invest in them then you should have a demat and trading account as well. In today’s age, opening a demat account is as simple as  opening a bank account. You can have a look at the details here.

How to Apply for IPO?

Every year companies make a beeline to the market regulator the Securities Exchange Board of India (SEBI) to clear their proposal to raise money through the public and get listed in the secondary market. 

In order to raise money, private limited companies first have to get converted to public limited ones and then with the help of merchant bankers meet all the guidelines set by SEBI. 

The company then prepares a Draft Red Herring Prospectus (DRHP) and submits it to the market regulator for approval. Since the DRHP is available on SEBI’s website, anyone can download it and research the company. 

Meanwhile, SEBI, at its end checks the prospectus and if found satisfactory gives the approval for the company to raise funds from the public. 

The company meanwhile goes on a roadshow, meeting key investors, institutions, and broking firms who through their clients will help the issue to get subscribed. 

Why should you apply for an IPO?

IPOs are double-edged swords. Since the company planning to raise funds was not being reported upon or had analysts covering them, an investor is unaware of its pedigree. The management style or capability gets morphed easily in the DRHP it is not easy to judge a company. Not every investment in IPOs will be profitable. 

Having said that, IPOs are also the best time to invest in a company, provided the company is good. A good company generally has a lot of investors’ interest and the issues are oversubscribed. These companies normally list at a premium and may never come down to the price at which the shares were offered in the IPO. Thus applying for the IPO makes sense as even if the investor gets part subscription, it would be at the lowest possible price. In a bad market, the market price of the stock may go below the IPO price, but if we are in a good market, the IPO price is rarely touched. 

To summarise: 

  • IPOs are a double-edged sword as the company has no history in the market and public, thus the risk is high. One should do a thorough research of the company and not get carried away by the oversubscription levels and hype around the issue. 
  • In case of a good IPO, the price offered could very well be the lowest price the company may see. Applying for such IPOs and getting even a fraction of the shares applied will help reduce the cost of acquisition of such companies. 

Prerequisites for applying for an IPO

The following accounts are required for applying for investing in IPOs and trading them in secondary market:

1.  Demat account- This is essential for storing shares in an electronic format and is mandatory for investing in an IPO.

2.  Bank account- This is required for making payment for the applied shares which is done through the ASBA facility. Application Supported by Blocked Documents (ASBA) is an easy way to apply for IPOs. It blocks the funds in your account for the IPO and the amount is only taken out when the shares have been allotted. The account holder also gets the opportunity of earning interest on these funds. More importantly, SEBI has made the ASBA facility mandatory for IPO bidding.

3.  Trading account- This is required for investing in an IPO online.

4.  UPI ID – You can have a UPI id linked to your bank account or create one if required from your existing bank account or BHIM app.

Eligibility criteria for IPO application

Applying for an IPO has become way easier and can be done through a mobile. There are still some criterias to be met to be eligible for an IPO allotment. They are

  1. You must be an approved investor. Meaning the SEBI (Securities and Exchange Board of India must give an approval. As of now only four types of investors can invest – Qualified Institutional Buyer (QIB), Retail individual investors and employees and Non-Institutional Buyer (NII)
  2. You must have a demat and trading account with any recognized DP(Depository Participant) in India like TradeSmart.If you do not have then you can create one here in an instant.
  3. Have a Permanent Account Number (PAN)
  4. You demat account needs to be linked with the bank account

How to apply for IPO

There are three ways to apply for an IPO

  1. Through a broker like TradeSmart
  2. Through Internet Bank
  3. Offline or physically 

How to apply for an IPO through a broker account

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
  • From the list of Current & Upcoming IPO’s, click on BID to participate in the IPO offer
  • 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.
  • Place your bid(s). Please note the below points.
    • While placing the bids, only a 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
  • Accept mandate request on your UPI App:
  • 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.

Applying for an IPO through a Bank (offline)

·   Visit the bank branch which offers facilities for making IPO investments.

·   Fill in the ASBA application form by providing details such as bank account number, PAN number, demat details etc. Submit the duly filled in application form and collect the acknowledgement slip. Use the reference number on the acknowledgement slip to verify your ASBA status.

·   Then submit an application to invest in the IPO of your choice and mention both the number of shares you want and the price acceptable to you. Also ensure that there are sufficient funds in your linked bank account.

·   The bank first blocks the application amount in your account and then sends IPO applications to specified stock exchanges.

How to apply for IPO online

This facility is usually available under the net banking or e-services tab. As the ASBA facility shows all the live issues currently, it enables the investor to invest in Follow on Public Offers (FPOs) and IPOs. The following steps are used to apply for an IPO through the net banking facility of any bank.

·       Log in to your net banking using username and password

·       Go to the request tab on the left and scroll down to IPO/Rights Issue option.

·       On the screen would be visible the list of IPOs and rights issue live. Click on ‘Apply’ in order to apply for the IPO you want

·       The next step will require you to fill in some information such as your date of birth, the number of shares you want to bid for, bid price etc.

·       Some details such as PAN card number, bank account number, nationality etc. are filled before-hand and cannot be altered. The information requested under Depository Details can be found in the Consolidated Account Statement. (CAS)

·       The final step involves confirming the amount to be blocked from the account, confirming the requisite terms and conditions and submitting the IPO application.

Applying for IPO via UPI can also be done easily through the following steps:

·       Select the IPO you want to invest in by logging in to your trading account.

·       Enter the price at which you would like to bid for these shares.

·       Provide UPI ID and complete your application form.

·       As a final step, approve the block funds request on the UPI app.

Benefits of applying for an IPO online

  • It saves time and you do not need to be physically present at the brokers office of bank
  • The process is more seamless and convenient. It even picks up the details automatically from the database so you don’t have to fill the form from scratch.
  • The amount set aside is still kept in your bank account till such time the allotment is confirmed and you can continue getting interest on that amount.

Ways in which you can increase your chances of getting an IPO allotment

  1. Apply with more than one demat account – you can apply for multiple demat accounts with different DPs. But when applying for more than one allotment for an IPO, you can only use one PAN number. One way is that you can get your family members or friends to apply for an IPO on your behalf to increase your chances.
  2. Bid at the cut-off price: Applying for the shares at the cut-off price increases your chances as it shows that you are comfortable paying that amount for buying the lot. For example, suppose there’s an IPO for a bid price of Rs. 200 per share. This is only to be done in cases where the company is fundamentally strong and the issue is oversubscribed.
  3. Approve the mandate request – A lot of new investors who apply for IPOs make this mistake. They just apply for the IPO through the brokers and end it there. Know that after applying, you receive a mandate request. You need to accept this request from your banking app or website and only then will the funds be kept aside and you will be considered for an allotment for the IPO.

Unlike the olden days where the process was cumbersome, time consuming and confusing, today with the help of technology the process of applying for IPOs has become seamless and easy. However, its the operational aspect that has become easier, for stock selection one will have to put in the hours to pick up a good company. 

Open Demat Account With TradeSmart

Lowest Brokerage Ever Trade @15 Per Order
Download TradeSmart App Now

Scan below QR Code
to download App

Open Demat Account