What Is IPO?

What is IPO – How to invest in IPO?

The world of finance is very vast in which we hear many terms every day. One such important term is IPO. IPO is the first step of entry for companies whose shares are traded in the market and helps a lot in further expanding their business. From an investor’s point of view, IPO is also a good way for us to earn a good return on our money in a short time. But before investing money in anything, it is very important for us to have complete information about it and how it works. Through today’s article, we will learn completely about IPO and by looking at its advantages and disadvantages, we will also understand how we can invest in an IPO.

What is IPO – Initial Public Offer?

IPO means Initial Public Offering. IPO is the process by which a private company offers its shares to the general public for investing and trading for the first time. The transformation of a private company into a public company happens only during IPO. Before IPO, only a few shareholders and investors are involved in the company, but after IPO, the shares of the company get listed in the stock exchange and any common investor and trader can buy and sell them. The main objective of the company behind bringing IPO is to raise money from people and increase the value of its company.

Why is IPO issued?

There can be many reasons behind a company issuing its IPO and getting listed in the stock market. The main ones are:

The company raises funds during the IPO for its further expansion and to repay the loans already taken. These funds are collected due to people investing in the company’s shares during the IPO and after its listing in the stock exchange.

When a company is converted from private to public, the confidence of the common people in it increases because being eligible for listing in the stock market is good for its reputation. Now the company has to disclose its every work and step taken in front of SEBI and the public, which brings transparency in its functioning.

Another major reason behind issuing IPO can be the attitude of the existing investors of the company. These investors, who are also called angel investors, invest money in the company in the initial days in the hope that when the company becomes profitable, they will get their investment. But you will get a good return. In this way, when the company performs well and gets listed in the share market, these investors sell their shares to the general public and encash their profits.

How many types of IPO?

There are two types of IPO: Fixed Price IPO and Book Building Issue.

Fixed Price IPO: In Fixed Price IPO, the company underwriters or the people who are hired to handle the entire process of IPO, determine the price of IPO shares based on the financial state of the company. A company’s finances can include many financial metrics including its assets, liabilities, profits and revenues, etc. In this type of IPO, usually the price of the share is undervalued i.e. less than its actual price, hence people are more interested in investing in this type of IPO, because when the company is listed in the stock exchange, its price goes up. The possibility of increase is quite high.

Book Selling Issue: This type of IPO is a new concept in India. In this, there is no fixed price of IPO, only minimum and maximum price is determined which is called floor price. Investors can bid to buy shares between these prices. According to the demand for shares, their price is determined after the end of the IPO bidding.

Process of IPO in India

The IPO process of a company includes the following steps:

Appointing an Investment Bank: There is a team of Underwriters in the Investment Bank whose job is to evaluate the financial state of the company. In this the company can take help from more than one bank. These people collect all the necessary information about all the financial aspects of the company like its assets, liabilities, profits, revenue, market capital etc. In this, an underwriting document is signed in which all the important information like how much money is to be raised through IPO, total number of shares to be issued etc. is described.

Preparing RHP and submitting it to SEBI: After the first step, the company files the Underwriter Registration Certificate and RHP i.e. Red Hiring Prospectus to SEBI. RHP contains all the necessary information related to IPO.

Application for listing in the stock exchange: In this step the company decides on which stock exchange it wants to list its shares and files the application there. The two main stock exchanges of India are NSE and BSE.

Roadshow: For two months before the IPO goes public, the company does extensive marketing about the IPO. In this, the company’s executives travel across the country and present all the positive facts related to the company in front of people and big investors so that good investment can be made in the IPO. The company also provides the option to some big investors like DII and FII etc. to buy shares at a fixed price before the company goes public.

Fixing the price of IPO: After marketing, the price of IPO shares is fixed, according to the two types of IPO mentioned above, this price can be fixed on the basis of fixed or book building price method.

Subscription of IPO: After all the marketing and price of IPO share is fixed, it is opened for public subscription. According to SEBI, an IPO can remain open for subscription for 5 days. During this time period all interested investors bid for IPO. When the subscription of IPO is closed, the company submits the final prospectus to ROC and SEBI which contains information related to the funds raised and the final price of shares.

Listing of shares: When the subscription of IPO is closed, the underwriters of the company credit the shares to the accounts of their subscribers. Usually, all the shares are delivered to the investors but in some cases like oversubscription etc., not all the IPO shares are allotted and their money is refunded to them. On a fixed date, shares are listed on the stock exchange for common people to trade and invest.

How to invest in a company’s IPO?

To invest in the IPO of any company, an application has to be submitted and the status of shares allotment is informed within 2-4 days after the closing of the IPO. Here it is not at all necessary that your application gets selected for shares allotment. It is like a lottery system and if you are lucky then you are allotted shares. If there is high demand for the shares of the company, many investors do not get even a single lot of shares. The IPO of any company remains open for subscription for 3 to 5 days in which shares are available for purchase within a fixed price band. Investors can bid at any price they want or submit an application to buy. IPO shares are available for bidding in the form of one lot. The price of one lot of IPO cannot be more than Rs 15000 and there are some rules for buying it:

To submit an application in IPO, you have to buy at least one lot, the price of which is between Rs 12000 to Rs 15000.
The limit for a common citizen to invest in IPO through a PAN is Rs 2 lakh. That means he can buy only that many lots which fall within the range of Rs 2 lakh. To invest more than Rs 2 lakh, you should be in NII category.

To invest in IPO, you must have a trading and demat account. In case of both these, you can invest in an IPO online in the following ways:

ASBA (Application Supported by Blocked Amounts)

Through UPI ID

ASBA (Application Supported by Blocked Amounts)

ASBA facility is available with almost all big banks. In this, the required balance in the bank for IPO is blocked through net banking, which is debited if you are allotted shares. Under ASBA:

1. Login to your net banking account.
2. Find the option of Request Tab or IPO Issue Tab.
3. Once you find that option, click on the Apply option.
4. After filling the necessary details there, the amount for IPO will be blocked in your account.
5. If you get allotment of IPO then this amount is debited.

Through UPI ID

1. Login to your trading account or App.
2. Go to the New IPO option and select the IPO in which you want to invest.
3. After filling the application form, share the UPI id.
4. Allow blocking of funds on your UPI app.

If you want to know what things should be kept in mind while investing in an IPO, then you can read our article:

Conclusion

An IPO is a golden opportunity for Indian investors to buy shares of good growth companies at low prices. But like any investment option, it is very important to thoroughly investigate every aspect of the IPO or consult a good financial advisor. Investing by knowing the IPO process well and understanding the risks involved can be a better step towards your financial goals.